From talking heads on Wall Street to anxious consumers on Main Street, it seems like a recession is on everyone's mind. And for good reason. For the second quarter in a row, the U.S. economy shrank, meeting the technical definition of a recession. But not everyone agrees with that assessment — at least not yet. In this short guide, we try to make sense of the United State's confusing economic picture, answering your most pressing questions: What is a recession? Are we in a recession already? And what does a recession mean for you?
A recession is a period when economic activity declines for more than a few months.
The Business Cycle Dating Committee within the National Bureau of Economic Research officially decides when we're in a recession.
We're probably not in a recession yet, but experts seem to think one is likely in the next year or two.
Recessions lead to higher unemployment, more bankruptcies, and a general slowdown of the economy.
Recessions usually last about a year in the United States.
What is a Recession?
A recession is a period when the economy shrinks. Economists quantify this shrinkage using Gross Domestic Product, which measures the value of all goods and services a country produces over time.
In other words, GDP measures a country's total output, and when this output declines for an extended period, then we are in a recession. The unofficial definition is negative GDP (shrinkage) for two consecutive quarters (six months). While that's already happened in 2022, we're (confusingly) not in a recession, according to most mainstream economists.
Plus, the official organization that declares recessions has a looser definition, and they haven't yet called a recession.
Who Decides We're in a Recession?
The Business Cycle Dating Committee at the nonpartisan National Bureau of Economic Research (NBER) officially declares recessions. This group of eight top economists defines a recession as "a significant decline in economic activity that is spread across the economy and that lasts more than a few months." However, it often takes months for the NBER to officially announce a recession, meaning their declaration is delayed and not a real-time assessment.
Are We in a Recession?
Probably not, but it depends on who you ask.
The U.S. economy has contracted for two consecutive quarters, so we're in a recession according to the shorthand definition. That said, companies continue to hire and unemployment remains low at 3.6%, which complicates things.
"When you're creating almost 400,000 jobs a month, that is not a recession," Treasury Secretary Janet Yellen said on Meet the Press.
Jerome Powell, the Chairman of the Federal Reserve, echoed that sentiment at a July 28 press conference, just after announcing a large 0.75 percentage point rate hike. And it seems like most economists agree. Even Lawrence Summers, an economist who's been vocal about a recession, pushed back on alarmism.
"The claim that we are in a recession if GDP number is negative is made by people either ignorant of economics or looking to make political points," he tweeted.
Another obvious reason we're not officially in a recession is that the NBER hasn't officially declared one, though that doesn't mean too much because their declaration is always delayed.
The White House now says it’s only a recession if you see a salamander wearing a top hat.— Conan O'Brien (@ConanOBrien) July 27, 2022
When Was the Last Recession?
America's most recent official recession was in April 2020. This is because the economy (measured in GDP) peaked in February 2020, only to drop precipitously in March and April because of the COVID-19 pandemic. While this contraction was brief, the NBER decided that the shrinkage was so great and widespread that they classified it as a recession.
What Happens in a Recession?
At the most basic level, the economy slows during a recession, meaning that:
The unemployment rate increases
The stock market crashes
Short-term interest rates fall
Inflation decreases (lower prices)
The poor state of the economy also has negative knock-on effects on people's well-being, including an increase in chronic stress. Another heartbreaking result of the 2007-2009 Great Recession was "economic euthanasia," or the "necessity" of pet owners to euthanize their animals because they couldn't afford them.
Is a Recession Coming in 2022?
The consensus among mainstream economists and pundits is that a recession looks likely in the United States.
But it depends on who you ask. Keep in mind that just as Republicans can score political points by criticizing the economy, the White House has an interest in downplaying recession fears ahead of the midterm elections.
68% of economists predicted a recession at some point in 2023 in a June Financial Times and University of Chicago survey of 49 macroeconomics experts.
More than 60% of CEOs across the globe say they expect a recession before the end of 2023 or earlier, according to a May survey from the Conference Board research group.
Former Treasury Secretary and prominent economist Larry Summers has been sounding the alarm for months, with predictions for a recession in 2022 or 2023.
The World Bank's President, David Malpass, said in June that a recession "will be hard to avoid" for many countries.
Heather Boushey, one of President Joe Biden's economic advisers, said in June that she's optimistic the country can avoid a recession.
In the wake of the Labor Department's June jobs report, which recorded 372,000 new jobs that month, Biden officials continue to project optimism.
The multinational bank HSBC's global chief economist, Janet Henry, told the New York Times in June that she and her team are not predicting a recession in the U.S., though she added that their forecasts "paint a picture of a downswing."
Economists at Goldman Sachs predict that we'll avoid a recession this year.
What Does a Recession Mean for You?
When the economy contracts, companies lay off workers, investment slows, and consumers spend less. That means that everyday Americans will lose their jobs, and many will also struggle to find work as businesses cut back on hiring. But economic downturns don't hurt everyone equally.
According to an NBER working paper, the Great Recession primarily affected men, Blacks, Hispanics, youth, and those with lower education levels, while women, whites, prime-aged workers, and those with high education levels fared better.
If there's a silver lining, it's that prices will likely fall as consumers cut back on spending.
What Causes a Recession?
It depends. In 2008, the U.S. housing market collapsed because of bad investments in high-risk mortgage-backed securities (MBS), which you can think of as bundles of home loans.
If we enter an economic downturn in 2022 or 2023, there might be several causes, including inflation, the Federal Reserve's hawkish increase in interest rates, and a lack of consumer confidence.
Right now, the Fed is increasing interest rates to battle inflation, which means that borrowing is getting more expensive and the economy is slowing down. If the Fed is too aggressive and cools the economy too much, then it could induce a recession. Keep in mind that the economy is complex, so it's difficult to pinpoint a single cause.
How Long do Recessions Last?
Recessions last 11 months on average, according to NBER data from 1942 to 2009. The most recent recessions include:
The COVID-19 Recession — February 2020 to April 2020 (two months)
The Great Recession — December 2007 to June 2009 (18 months)
The Dot Com Recession — March 2001 to November 2001 (eight months)
The Gulf War Recession — July 1990 to March 1991 (eight months)
The Volcker Shock — July 1981 to November 1982 (16 months)
The Bottom Line
Most experts agree that a recession seems likely, but it's less clear when it will happen and how severe it will be. While there are things you can do before (and during) an economic downturn to make it more bearable, everyday Americans will have to do some belt-tightening. In any case, the market will bounce back, so hold tight, stay informed, tighten those purse strings, and maybe put off buying that new car.