The National Bureau of Economic Research provides that a recession occurs when "a significant decline in economic activity" lasts more than "a few months."
It has been more than 10 years – in fact, a record long time – since the US economy experienced a recession. Several signs are appearing for another to be on the horizon.
The upside is that most economists do not expect this next downturn, when it will happen, to be something like the Great Recession, which broke records for length and severity. But typical downturns are no picnic either.
This is what usually happens during one, and why the next one is not expected to be like the Great Recession.
The loose definition of recession is two straight quarters of decline in real gross domestic product, the broadest measure of growth in the United States.
But the official statement comes from the National Bureau of Economic Research, a private organization of economists, which states that a recession occurs when there is "a significant decline in economic activity" lasting more than "a few months."
The organization considers the following financial measures to determine a recession:
- Employees on non-farm wages
- Personal income minus transfer payments
- Industrial production
- Production and trade turnover
NBER, however, declares a recession with retroactive effect. for example, it did not confirm the Great Recession until November 2008, 11 months after it began.
Economists look at leading economic indicators to predict when a recession will come, one of which is the reverse yield curve, the signal that emerged this week in the bond market and sent shares to a tizzy. the yield on the 10-year government bond falls below the yield on the two-year bond.
But the inversion only indicates that a recession is coming. It does not predict when it will arrive, says Kathy Bostjancic, US economist at Oxford Economics.
"The time from inversion to the beginning of a recession is long and variable," she says. "It ranges from 10.5 months to 36 months."
Other leading indicators economists follow are an increase in initial unemployment claims, how consumers view business economic activity measured by consumer confidence surveys and new production orders. Housing permits were once considered a good indicator, but not this time.
"It is beyond the norm because of structural challenges that dwell from the recent recession," Bostjancic says.
What happens in a recession?
Stripping out the Great Recession – as Moody's chief economist Mark Zandi once called in a 50- or 100-year event – the recession since the end of World War II lasted six months to 16 months, averaging 10.4 months. The major recession was longer at 18 months.
Jobs: During a recession, jobs disappear. The largest monthly decline in employment in the last 10 recessions – excluding the major one – averaged 2.6%.
Generally, the biggest losses are in industry and related industries, says Zandi. Sectors that rely on more discretionary spending, such as leisure, hospitality and retail, will all lose their jobs.
Employment in financial industries will also shrink because companies and individuals borrow less. Jobs in construction, technology, media and entertainment also tend to retire.
But there are some jobs that aggravate decline without major losses, says Zandi, such as those in health care, professional services such as legal and accounting, government and education.
Even If you keep your job during a downturn, you may not receive a raise or bonus. Your hours and wages can also be reduced, says Zandi.
Shares: As stocks tank during a recession, they bounce back faster. Usually, the stock market begins to fall from the peak months before the actual recession begins. It is also starting to recover before the recession technically ends.
Take the dot-com era.
This recession started in March 2001, but the shares had already peaked 14 months before. Dow fell 11% before the recession began, heading for a 30% route at its worst when it settled in September 2001. The recession did not end until two months later, a period when Dow collapsed 20%.
During the official decline – from March to November 2001 – the Dow fell 5.7%. The Dow rose 6.8% and 7.4% during the recession of 1980 and 1981-82, respectively.
Because the banking system has a much more solid footing and household debt remains affordable, the next recession will be more "the garden," says Zandi, "and nothing like the Great Recession." He predicts it will last six to 12 months, and unemployment will increase by two to three percentage points.
What could make it worse is the lack of firepower to counteract a downturn. The Federal Reserve usually cuts 5 percentage points from the federal fund rate during a recession to boost lending. But this rate is less than half that, says Bostjancic.
"So they have limited monetary ammunition, and that's the big concern," says Bostjancic, "not only here, but also around the world."
Recent reports also suggest that the Trump administration has not yet considered a response to a possible recession.
"It's hard to imagine the Trump administration and Congress gathering it fast enough to make any meaningful difference," Zandi says. "This may be a ten-year recession, but may go to one-in-25."
Although the US economy may appear to be on the paper, some drastic decisions were made during the recession and are still digging out of deep holes.
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