What is a recession? The economic concept explained and what happens during one.
As prices increase and gross domestic product declines, many people worry about a potential economic downturn, also known as a recession.
Consumer prices rose 8.2% from a year earlier in September while core prices, which exclude volatile food and energy items, climbed 6.6% annually, according to the Labor Department’s consumer price index.
Meanwhile, GDP, or the value of all goods and services produced in the U.S., increased 2.6% in the quarter ended Sept. 30, after dropping at an annual rate of 1.6% in the first three months of the year and 0.6% in the second three, according to the federal Bureau of Economic Analysis.
Adding to concerns, Jamie Dimon, chief executive of JPMorgan Chase, the largest bank in the U.S., warned at a conference in London in October that a “very, very serious” mix of challenges was likely to push both the U.S. and global economies into recession by the middle of next year, CNBC reported. For now, he noted, the U.S. economy was “actually still doing well” and consumers were likely to be in better shape compared with the 2008 global financial crisis.
If a recession does happen, how will it unfold, and what does it mean for everyday life?
Here is what you need to know.
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What is a recession?
In simple terms, a recession is “a contraction in economic activity” or “when the economy shrinks,” said Sameer Samana, senior global market strategist for the Wells Fargo Investment Institute.
To be more specific, a recession is “a significant decline in economic activity that spreads across the economy and lasts more than a few months,” said Michael Pugliese, an economist with Wells Fargo.
In determining whether a recession has occurred, the nonprofit National Bureau of Economic Research doesn’t just look at GDP but rather at a variety of indicators such as employment, consumer spending, retail sales and industrial production.
When it comes to defining a recession, it could be a technical recession or a true recession, said Samana.
“The biggest distinction is the severity,” he explained. “A technical recession is more of a mathematical downshift. A true recession is a more meaningful contraction across a broader range of categories.”
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What is a mild recession?
A mild recession could cost the economy 1.8 million jobs if the nation’s gross domestic product, or economic output, declines 1.2%, and the unemployment rate rises from a 50-year low of 3.5% to 5.4%. The national unemployment rate rose from 3.5% to 3.7% in October even though hiring remained strong amid recession fears.
What is a severe recession?
A severe recession could mean 3 to 4 million job losses, a 2% to 2.5% decline in GDP, and a 7% unemployment rate. The “Great Recession” lasted from December 2007 to June 2009, which was the longest economic downturn since World War II, according to the Federal Reserve.
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What happens during a recession?
During a recession, the economy shrinks as a result of a pullback on individual spending, said Samana.
“Consumption, consumer spending makes up about 70% of the U.S. economy,” he said, explaining that during a recession, the cutback in spending “then feeds into overall demand for services.”
From this, companies can pull back on the number of people they employ, further contributing to the contraction of economy activity. Unemployment often rises during recessions, and total employment levels can flatline or turn negative, said Pugliese.
In addition, GDP growth tends to shrink during recessions because there’s less consumer demand and fewer employees, leading to lower production of goods and services.
“If you have fewer employees, all else equal, you’re going to potentially produce less in a recession,” Pugliese said. “All of these things are tied together. Most of those indicators are either slowing down in growth terms, or in many cases, contracting.”
Wages are also affected by recessions, said Samana.
“It’s harder to argue for wage increases,” he explained. If unemployment is high, employers could deny the salary request and claim a worker could be replaced by someone else for a lower wage, instead of a higher one.
Much like other goods and services, housing prices also can decrease during a recession, he said.
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How long do recessions last?
To be categorized as a recession, an economy must experience a couple of back-to-back quarters of shrinking output, said Samana.
However, there is no definite timeframe for how long a recession must last, and the length of a downturn can vary, explained Pugliese.
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Who suffers the most during a recession?
Anyone can be impacted during a recession, said Samana, such as lower-income people or unskilled laborers.
It is hard to generalize that one group may experience a greater impact more than others, said Pugliese. During the 2020 recession due to COVID-19, the hardest hit industries were leisure and hospitality, but in the 2001 recession, the tech industry struggled, he explained.
“I think it just depends a lot of what’s driving the slowdown in the first place,” said Pugliese.
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What happens to inflation during a recession?
Historically, when the economy has slowed, inflation appears to remain high.
But as a recession sets in, inflation will begin to fall. This can occur after a quarter or two of economic contraction, said Samana.
“The tricky part this time around is how much does it come off,” he said. “How it should work is the economy would need to roll over first; people would need to feel the impacts of that rollover. They’ll probably start to rein in their spending, which will then start to filter into those prices.”
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Is there going to be a recession?
The most likely scenario is still a modest recession that lasts six to nine months. According to a survey by Wolters Kluwer Blue Chip Economic Indicators, 88% of economists predict a downturn will be mild
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What should you buy before a recession?
It’s not a bad idea to stock up on household goods and shelf-stable foods now while you still have a regular paycheck if you’re afraid you won’t have one in a couple of months.
But make sure to not get carried away.
You may also want to try to pay off as much debt as possible, particularly any high-interest debt.
What should you avoid doing in a recession?
In a recession, spending should be monitored. Try to avoid frivolous spending and going off budget.
Additionally, if possible, try to avoid taking on more debt.
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Should you buy a home during a recession?
Americans are split on whether they would buy a home during a recession, according to a study by Cinch Home Services, a warranty company.
The National Association of Realtors defines a housing recession as when home sales drop for six straight months. In September, existing-home sales declined for the eighth consecutive month, and sales were down almost 24% from a year ago.
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