There has been a lot of chatter recently about the possibility of a recession.
Yet what exactly does that mean — and what would a potential downturn look like?
A recession is defined as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months,” according to the National Bureau of Economic Research.
The U.S. economy has experienced 12 recessions since World War II, and each one included two features: Economic output contracted and unemployment rose.
Today, something highly unusual is happening. Economic output fell in the first quarter and signs suggest it did so again in the second. Yet the job market showed little sign of faltering during the first half of the year. The jobless rate fell from 4% last December to 3.6% in May.
Signs of economic weakness are multiplying, with personal spending falling in May for the first time this year, after accounting for inflation, and a U.S. manufacturing gauge hitting a two-year low in June. JPMorgan Chase’s chief U.S. economist Michael Feroli responded to the latest data by cutting his mid-year growth forecasts “perilously close to a recession.”
The depth and length of the recession will largely be determined by how persistent inflation proves to be, and by how much pain the Fed is willing to inflict on the economy to bring it down to levels it deems acceptable.
For his part, Fed Chair Jerome Powell has argued that while there’s a risk of a recession, the economy is still in good-enough shape to withstand the Fed’s interest-rate hikes and dodge a downturn.
Despite the Fed’s significant hawkish pivot since November 2021, inflationary pressures have not eased meaningfully and may have arguably worsened.
Fed Chair Jerome Powell has begun saying the quiet part out loud: The central bank is willing to tolerate a recession if it means getting inflation under control. “The bigger mistake to make,” he said on June 29, “would be to fail to restore price stability.”
Americans are already pessimistic about the economy even as unemployment sits at 3.6 percent — near modern-era lows — and a contracting economy would deepen the pain, bringing a wave of layoffs and pay cuts.
“The mood could get a lot more sour,” said Bivens, who argues that if the economy contracts, that would mean the Fed has screwed up by going too far in trying to curb surging prices.
Across the nation, the leading topic of economic conversation — high inflation — is swiftly morphing into growing certainty of a coming recession. White House allies are bracing for it. Republican lawmakers are trumpeting that a downturn is inescapable.
Wall Street analysts are increasingly building it into their forecasts. And business leaders have rapidly moved from muted fears to openly chattering about an economic slump during investor discussions and inside their companies.