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What is a Recession and is the U.S. in a Recession?

Picture of a dollar bill and its reflection beneath it

In recent weeks just what a recession is, and whether the United States is in a recession, have been debated. Southern New Hampshire University economics instructor Valbona Cela answered those questions and offered insight about the effects of the recession on businesses and individuals and what you can do to try to prepare financially for a recession.

Valbona Cela

What, technically, is a recession?

According to Economics textbooks, recession is a decline of Gross Domestic Product (GDP) for two consecutive quarters, which was introduced in 1974 by economist Julius Shiskin.

According to The National Bureau of Economic Research (NBER), a recession is “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.”

Is the U.S. in a recession or headed for one?

In order to be in recession, the country should experience high inflation and high unemployment rate besides the decline in GDP. Unemployment rates are historically low, so we are not in recession yet, but we are probably heading towards one. The last recession was the Great Recession in 2007-2009 and a brief one in 2020 due to the Covid-19 pandemic.

According to the U.S. Bureau of Economic Analysis (BEA), the U.S. economy experienced a short recession in the first and second quarter of 2020 due to Covid-19 lockdown restrictions and employees losing their jobs. GDP decreased more than 25% in the second quarter of 2020.

Real gross domestic product (GDP) decreased at an annual rate of 0.9 percent in the second quarter of 2022, according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 1.6 percent

Even though the GDP decreased by 0.9% in the second quarter, it shows that the GDP increased by 0.7% compared with the first quarter.

The unemployment rate is historically low at 3.5%. According to Bureau of Labor Statistics (BLS) “the unemployment rate have returned to their February 2020 pre-pandemic levels.”

It is hard to predict whether the US economy is heading towards recession. However, high inflation (contracts the demand), while high interest rates imposed by the Federal Reserve, makes borrowing more expensive (consumers borrow less). Therefore, there is less spending (contracts demand) and businesses invest less in new equipment (contracts the supply), which are two factors which can contribute to a recession. The time lag prevents us from seeing the results right away, however, at the end of this year or beginning of 2023 we might experience a recession.

Can anything change to avoid a recession at this point?

There are several measures that can be used to control either the demand, supply, or both. The Federal Reserve is trying to control high inflation by imposing higher interest rates, which makes borrowing more expensive, so consumers and businesses will spend less, affecting production; hence GDP. If supply contracts, workers will start losing their jobs.

At least consumers are getting some relief at the gas pumps. The gas prices had an uptick in March 2022, upper $4.00/ gallon for regular unleaded, and now we are seeing a drop below $4.00 gallon on average. When gas prices go down, as a rule of thumb, transportation costs go down as well, which might reflect at a later time (time lag) on a drop in consumer prices.

The economy is always unpredictable because non-economic measures, such as a pandemic or the war in Ukraine, can affect the outcomes other than the economic measures (such as Fed’s interest rates); therefore, it is difficult to predict whether a recession can be avoided.

How would a recession impact individuals, small businesses or even large companies?

The recession impacts individuals in several ways such as:

  • Losing your current job
  • Having a hard time finding a new job, since the pool of unemployment is much larger (more people are out of work)
  • Having a hard time negotiating future pay raises
  • Might see their benefits or pay cuts
  • Unable to pay the bills due to job loss
  • Losing your home due to unemployment

The recession impacts small business in several ways such as:

  • Reducing supply/ sales might force them to file for bankruptcy.
  • Reducing profit
  • Reducing market/ investment funds

The recession impacts large companies in several ways such as:

  • Reducing supply/ sales might force them to file for bankruptcy.
  • Reducing profit
  • Reducing market/ investment funds
  • Reducing funds in research and development
  • Massive layoffs
  • Curbing credit access
  • Declining of stock market

How does the current situation compare to recessions in recent history?

Every recession is different from one another. The current economic situation is different from the Great Recession of 2007-2009. The Great Recession was caused by the housing bubble and financial crisis. That led to a huge number of foreclosures, bank bankruptcies, and a worldwide financial crisis. During the Great Recession, the GDP fell 2.8% in 2009 and the unemployment rate briefly reached 10%. As of right now, the GDP fell 0.9% in the second quarter and a very low unemployment rate of 3.5%.

What can consumers do to prepare for or best handle the impacts of a recession?

It is hard to predict when the recession will hit, let alone prepare how to handle the impacts of it. A lot of experts suggest that you should have savings for at least 6 months; however, those savings get decimated if inflation is high. Consumers should put aside major investments, such as renovations, buying “big ticket” items, such as furniture, electronics, computers, appliances and cars.

Consumers should plan to afford groceries and pay their monthly bills. During recession, consumers should plan to cook more at home than dining out, so they can stretch their dollar further. Like everything else, there’s a silver lining, and that is that recessions do not last forever. According to Macrotrends, The Great Recession lasted for 18 months and the GDP increased from -2.6% to 5.67%.

Valbona Cela has worked in traditional and online education for more than 17 years and has taught at SNHU since 2011. She holds a Bachelor of Arts Economics from the University of Tirana, Albania and a Master of Science in natural Resources and Environmental Economics from Colorado State University. Media members interested in interviewing her should contact media@snhu.edu.

References

  1. Bureau Of Labor Statistics (2022) – News release THE EMPLOYMENT SITUATION - JULY 2022 https://www.bls.gov/news.release/pdf/empsit.pdf
  2. News release (2022) Gross Domestic Product, Second Quarter 2022 (Advance Estimate) https://www.bea.gov/sites/default/files/2022-07/gdp2q22
  3. Rodeck, David (2022) - What is a Recession https://www.forbes.com/advisor/investing/what-is-a-recession/
  4. U.S. GDP Growth Rate 1961-2022 (2022) https://www.macrotrends.net/countries/USA/united-states/gdp-growth-rate

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