Chaotic stock markets, sky-high interest rates and the pain of inflation have left one question at the top of Americans’ minds: Are we in a recession?
Chaotic stock markets, sky-high interest rates and the pain of inflation have left one question at the top of Americans’ minds: Are we in a recession? Probably not yet, but there are signs of economic weakness emerging. When that will turn into a prolonged slump, and how long that downturn might last, are important questions preoccupying people on and off Wall Street. Major banks have upgraded their forecasts to reflect the increasing possibility of an economic downturn. Analysts at Goldman Sachs put the probability of a recession over the next year at 30%, up from 15%. Economists at Bank of America predicted a 40% chance of a recession in 2023. Here’s a brief guide to what you should know about recessions and why some people are talking about the next one now. What is a recession? Simply put, a recession is when the economy stops growing and starts shrinking. Some say that happens when the value of goods and services produced in a country, known as the gross domestic product, declines for two consecutive quarters, or half a year. In the United States, though, the National Bureau of Economic Research, a century-old nonprofit widely considered the arbiter of recessions and expansions, takes a broader view. According to the bureau, a recession is “a significant decline in economic activity” that is widespread and lasts several months. Typically, that means not only shrinking GDP but also declining incomes, employment, industrial production and retail sales. While the bureau’s Business Cycle Dating Committee declares when we are in a recession, that often happens well after the slump has already begun. Recessions come in all shapes and sizes. Some are long, and some are short. Some create lasting damage, while some are quickly forgotten. A recession ends when economic growth returns. Why do some people think a recession is coming? The short answer: the Federal Reserve. The central bank is trying to slow the economy down, in order to curb inflation, which is now rising at its fastest pace since 1981. Last week, the Fed announced its biggest interest rate increase since 1994, and more big jumps in borrowing costs are likely this year.
