The International Monetary Fund on Tuesday cut its global growth outlook for 2022 and 2023, warning that the world’s three biggest economies — the U.S., China and Europe — face a “gloomy and more uncertain” future with a recession a possibility.
Later this week, data on the U.S. gross domestic product will be released and the measures of production in the United States will give economists in this country information that they will use to determine if a recession has already begun here.
So, what is a recession and who decides if we are in one? Here’s what we know now.
What is a recession?
A recession is a significant decline in economic activity that continues over a period of time and affects all sectors of the economy, according to the National Bureau of Economic Research (NBER).
The NBER, a century-old, nonprofit body that studies the country’s economy, convenes a panel of economists called the Business Cycle Dating Committee. That committee determines when the U.S. is in a recession.
How does the committee decide?
The Business Cycle Dating Committee makes the call on whether there is a recession, and that call can come a year or more after the country experiences a recession.
The economists look at several factors to determine if the country is in recession. Industrial production, interest rates, employment numbers and whether those numbers are declining are all factors the economists use to determine whether the country is in a recession.
Another factor the committee looks at is the depth of the problem. Is more than one sector of the economy suffering, or is the problem centered on a specific area, such as energy prices?
“The narrative that the economy has slowed quite a bit and is showing signs of deterioration from higher inflation and higher interest rates, that narrative is solid,” said Ellen Zentner, chief U.S. economist for Morgan Stanley.
“But when you look at factors like jobs, where we’re still creating three to four hundred thousand jobs a month, with an unemployment rate that has not begun to show signs of sustained increases, and the cushions of excess savings, healthy household balance sheets — these are things that go far in keeping the U.S. out of recession, or at least staving off recession for longer.”
Do others think we are in a recession?
Even with a report this week that says the GDP is either flat or in negative territory, most economists are reluctant to say the United States economy is in a recession.
However, some have revised their predictions that a recession could be coming soon.
“A month ago, I was writing that it was very unlikely that we are in a recession,” Jeffrey Frankel, a Harvard economist and former Business Cycle Dating Committee member, told The New York Times. “If I had to write that now, I would take out the ‘very.’”
No recessions have ever been declared without a loss of employment. Last month, hundreds of thousands of jobs were added to the U.S. economy.
The June rate of industrial production, a number used when deciding if the country is in recession, was rising.
On the other hand, according to Reuters, since 1950 the United States has not experienced a contraction in GDP two quarters in a row that was not ultimately declared a recession.
Are recessions always bad?
Recessions are part of the economic cycle, said Mellody Hobson, a financial contributor for ABC.
The longest one over the past 60 years lasted about 15 months. Hobson says she believes we would probably not see anything like that today.
What happens during a recession?
The first thing that happens is that businesses produce less, and consumers spend less. A drop in production can lead to layoffs, as can a decline in the demand for goods and services.
Interest rates rise and unemployment numbers go up. Inflation goes up before the economy begins to grow again.
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