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Q&A: Key facts about a recession
With all the talk of a recession lately, what exactly is a recession, what determines when we are in one, and how does a recession occur?
- A recession is a macro-economic term that refers to a significant decline in general economic activity in a designated region.
- Typically a recession was recognized as two consecutive quarters of economic decline, as reflected by gross domestic product (GDP) in conjunction with monthly indicators such as a rise in unemployment.
- However, the National Bureau of Economic Research (NBER), which officially declares recessions, now says the two consecutive quarters of decline in real GDP are not how it is defined anymore. The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. (Investopia)
What have past recessions looked like?
- The most recent recession was during the onset of the COVID-19 outbreak, which lasted only two months, but saw GDP fall to -19.2% and unemployment as high as 14.7%
- The Great Recession of 2007 lasted one year and six months, with peak unemployment at 10% and GDP -5.0%, driven mostly by the sub-prime real estate crisis.
- The period from 1969 to 1982 is probably most relevant to today; as U.S. expenditures on Vietnam, global shift of manufacturing abroad, high oil prices, and inflation produced four recessions, lasting more than four years of the 13-year period.
Theoretically the interest rate needs to be as high as the inflation rate to curb inflation. Current inflation is 8.6 %, while interest rate is now 1.5%.
Why are some economists expecting another recession?
- First quarter 2022 GDP growth dropped by 1.5 % in the U.S., leading many economists to think we are heading into a recession.
- Consumer prices and producer prices both gave indications that inflation is not slowing.
- The Federal Reserve Bank has a mandate of pursuing dual economic goals of maximum employment and price stability. The tools they use are raising or lowering interest rates and asset purchases of treasuries.
- The Fed has been raising interest rates to fight inflation along with stopping asset purchases and reducing their balance sheet. Theoretically the interest rate needs to be as high as the inflation rate to curb inflation. Current inflation is 8.6 %, while interest rate is now 1.5%.
- Raising rates has the net effect of slowing the economy and increasing unemployment.
- U.S. inflation has been more than 5% for longer than a year and the Fed has been slow to act. Housing, fuel, electricity, and food prices are still rising. Wages are rising but on a pace below inflation, reducing buying power and adding to monthly bills.
Forecasts:
- The Atlanta Federal Reserve’s GDP Now Tracker most recent forecast for growth, issued in late June, was a negative revision and indicated the economy could be headed for a second consecutive quarter of negative growth, which meets a classic definition for recession.
- The World Bank just slashed its global growth outlook, warning that a period of stagflation like the 1970s is possible
- JP Morgan Chase CEO Jamie Dimon issued a warning about the economy and said “brace yourself.” (CNBC)
The tools of the Fed are limited. The effect of the Ukraine War and U.S. injecting almost $7 trillion into the economy since 2021, along with trying to eliminate fossil fuels without a viable alternative has increased inflation to 42-year high levels. With no end in sight for lower oil prices, the Fed will raise rates until it creates an uncomfortable amount of job losses, and then may pause to determine what to do next.
Written by David Grimaldi, TM Foreign Exchange Sales Consultant
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