Many people fear a recession. And for good reason! A recession generally means that the economy is faltering and the outlook dims. The generally accepted definition of a recession is two consecutive quarters of negative economic growth. In 2022, the first and second quarters contracted. But the economy expanded slightly in the third quarter. Despite not hitting recessionary levels, the general economic malaise had people feeling bad—really bad, as evidenced by consumer sentiment reaching decade lows.1 Of course, it makes sense that people don’t feel confident, especially with the Great Recession fresh in the minds of many.
Although the 2020 COVID-induced recession was steep, it was relatively short-lived and readily forgotten because health concerns and unprecedented government assistance overshadowed it. But the Great Recession—the worst since the Great Depression—was only about 15 years ago. This 19-month period from 2007-2009 saw GDP shrink three out of four quarters in 2008, and unemployment subsequently rose to 10%.2 Are shrinkage and job loss common during a recession?
Characteristics of a recession
Before we dissect the typical recession, we should note that economic contractions are a normal part of the economic cycle. We’re not saying they’re not painful—they often are—but they're not a "world is ending" scenario. So now, let's cut to the chase and understand recessions.
The National Bureau of Economic Research (NBER) is the official recession scorekeeper. It tracks variables such as real personal income minus government transfers (income), employment (the job market), various forms of consumer spending (how much businesses and consumers are spending), and industrial production (manufacturing of big, expensive goods like cars, heavy machinery, or furniture). Combining these inputs helps NBER determine if the economy is in a recession.
Each of these variables tends to follow a specific pattern in an economic contraction:
These variables reflect data from the past month or several months—they are always backward-looking. That means that by the time the NBER gives the official recession stamp, the economy had already been in a contractionary period, sometimes for up to 18 months. This is important because saying we're in a recession is not telling us what could happen but what has already started to occur. In other words, the consumer had already been feeling the effects—the pinch—probably long before the NBER made it official.
Examining today’s economy
Some people believe that the economic woes of 2022 came out of left field. But many economists saw that the economy—aided by the government’s pandemic stimulus packages—was running too hot (meaning growing way too fast!).
If you take a trip down memory lane and look at the end of 2019 and the beginning of 2020 before COVID took its toll, the economy started slowing after a decade-long bull run that began after the Great Recession. But then the pandemic hit, the government propped up the economy with stimulus packages, consumers had lots to spend, and the impending contraction turned into a high-flying economic expansion. It was like ignoring the necessary rebuild of a sports team by patching it up with an older veteran. Eventually, the patch fails.
What does the 2023 rebuild look like?
Source: Bureau of Labor Statistics, Haver Analytics, Apollo chief Economist, Data as of Oct. 1, 2022
Source: Federal Reserve Board, Haver Analytics, Apollo Chief Economist, Data as of Nov. 2, 2022
So, a recession?
There are various measures that investors, economists, and the Fed use to forecast if a recession is on the horizon. For example, the New York Fed looks at the probability based on treasury spreads. Right now, it is assigning a probability of only 38% based on treasury spreads. (To put this in perspective, the NY Fed estimated about a 40% chance of a recession before the Great Recession!) In contrast, Bloomberg’s latest survey of economists estimates a 70% chance of a recession this year. It’s a confusing picture for investors to decipher for sure.
But maybe the question is not if a recession is looming. Rather, investors should be concerned with how a recession may impact their investments.
We tackle these questions in our next installment, “Recession Obsession: How Scared Should Investors Really Be?”
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