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If you spend time on social media or watching mainstream financial media, you know that we've been due for a recession for about two years. It seems like every day a new set of economists are predicting a new timeframe. Below is my account of what's actually happening:
What is a recession?
Not surprisingly, we can't even agree on what a recession is, and as a result, there are multiple definitions of a recession, including:
Most Commonly Used Rule of Thumb: Two consecutive quarters of negative economic growth, as measured by gross domestic product (GDP).
NBER's Business Cycle Dating Committee: A significant decline in economic activity that lasts more than a few months. Visible in production, employment, real income, and other indicators.
Sahm rule: The three-month moving average of the unemployment rate rises by at least half a percentage point relative to its lowest point in the previous 12 months.
Why do they occur?
Recessions are often triggered by a variety of factors, including:
Financial crises: The most recent example of this was in 2008 when excessive risk-taking resulted in the collapse of the real estate market and several financial institutions, such as Lehman Brothers.
External shocks: An external shock is an event that occurs outside of the economy, such as a natural disaster, a trade war, or more recently, a pandemic.
Asset bubbles: Think no further than the ".com" bubble when every company that ended with ".com" was valued as a tech giant.
When do they occur?
If we use the rule of thumb definition of two consecutive quarters of negative economic growth, recessions have occurred in the United States about once every 6.5 years, based on data from the National Bureau of Economic Research. Recessions vary in length, but typically last 11 months. Our last recession was during the peak of COVID-19 and lasted only 2 months, while the the prior recession, known as the Great Recession in 2008 lasted 18 months.
When will the next one occur?
Economists have no idea, but are paid well to take educated guesses. These forecasts are continually revised and according to most it should have taken place by now.
Assuming we do fall into a recession soon, this one may be more "self-imposed" than in the past. What I mean by that is the Federal Reserve has been raising rates at a fast pace to tame inflation which may trigger a recession. For non-economists, the short story is that we were all consuming too much, which was driving prices up (otherwise known as inflation). In response, the Federal Reserve has been raising rates to make it more expensive to spend and also incentivize saving. It becomes more expensive with higher mortgage rates, credit card rates, etc., and more alluring to save with cash actually yielding 5%. The net result is that we should spend less, save more, and lower inflation. The danger lies in pushing it potentially too far and turning a "soft-landing" into a recession. For example, we've already experienced multiple bank failures this year as a result of the sharp increase in interest rates.
Even if the Federal Reserve manages a "soft-landing" it will feel bumpy for most Americans.
If you are concerned about the endlessly pending recession, the best way to prepare is with a financial plan that will allow you to confidently navigate through the storm.
For less than $5/day, Walk You To Wealth is the most affordable way to access professional help. Schedule a free introductory meeting below:
Disclaimer: The information in this post is provided for your convenience only and is not intended to be treated as financial, investment, tax, or other advice. The information is intended to be educational and is not tailored to the investment needs of any specific individual. It is also not intended to be relied upon as a forecast and is not an offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are those of the author. Reliance upon the guidance and information in this presentation is at the sole discretion of the individual.
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