Is a recession coming? Many people are starting to worry as the current economic climate is not looking great. The 2008 recession was difficult for many people, costing millions of jobs and businesses.
Are we in another one? It might seem obvious, but you might be surprised how many people don’t know if we’re in a recession. This article will discuss if we are in a recession, what indicators to know if there will be another one soon, and how you can protect yourself from its impact on your finances.
What is a recession? Definition of Recession
A recession is a prolonged period where the economy contracts or declines. When this happens, it’s called a recession. This can be measured by the change in Gross Domestic Product (GDP), which is the value of goods and services produced in the country. GDP measures the total value of goods and services produced in the economy, regardless of who produced them.
The main reason for an economic downturn is a fall in demand and loss of production (due to lower investments, less consumption, higher imports and lower exports). A recession is usually identified when many economic indicators show a decline in economic activity.
A soft landing is a cyclical process of slowing economic growth and avoiding a recession. A central bank tries to slow down economic growth without causing high Inflation when it wants to raise interest rates without resulting in a severe recession.
What are the Recession Indicators?
The leading indicators that signal a recession are
- a decrease in GDP,
- an increase in unemployment,
- a fall in stock & commodity prices,
- a drop in the volume of commodities and
- a rise in the number of times individuals spend at their jobs.
How do we know if a recession is coming?
This question has no specific answer, as it depends on various factors. However, signs of a recession may loom, including increased layoffs and closures, falling stock prices, increased consumer borrowing rates, and deteriorating economic data. If these indicators are present in an economy, it’s often safe to say that a recession is near.
There are several ways to tell if the economy is heading into a recession. Here’s a look at some factors that could suggest a recession is near
- Decrease in Consumer spending:
A rapid decline in consumer spending may lead to lesser production and services. This adverse reality can lead the economy to a recession sooner or later.
2. Limited Business Investment
Lack of confidence among businesses and consumers, increasing global uncertainty and instability, and rising interest rates discouraged investors from putting their funds in any economy.
3. An increase in Unemployment Rate
Less business investment and lack of job opportunities increase the unemployment rate. The uptrend in the unemployment rate takes the economy down and causes recession.
4. A decline in Housing prices
When house prices fall rapidly, there is a negative wealth effect. This occurs when consumers observe their most significant asset losing value, resulting in lower consumption and higher savings.
Banks may be in trouble if people default on their mortgage payments if house prices drop dramatically.
Banks can utilize the house as collateral against borrowers if its value exceeds the amount owed. This also reduces the amount of lending, which reduces the economy’s consumption—a signal of economic downfall.
5. A decrease in Stock prices
It is evident that when the stock prices fall, the value of the companies declines. As a result, it wipes out the gains from the market and forces businesses to cut costs. It further creates pressure on the companies, which hurts the economy negatively.
Many factors influence stock prices, including global economic conditions, political instability, and news events.
6. Decrease in Oil prices
Several factors contribute to the low oil prices, including a global glut of crude oil supply, declining production, and weak global demand for crude oil. Some oil businesses may go bankrupt if prices drop significantly, increasing bad debts.
The dramatic decline in oil prices in 2020 indicates an economic recession, and prices have dropped so low that many oil companies will be forced out of business, resulting in job losses and a decline in investment.
7. High Inflation Rates
An increase in the money supply is the most common cause of Inflation. When more money is created, it becomes available to buy more goods and services.
Another factor that causes Inflation is increased demand for goods and services. When the economy grows faster than the number of available jobs, people may start spending more money on things like cars and houses.
The PCE Price Index (Personal Consumption Expenditure Price Index) captures Inflation (or deflation) across a wide range of consumer expenses and reflects changes in consumer behavior. Whenever Inflation is higher than 4% and unemployment is lower than 5%, the U.S. economy enters a recession within two Years.
High Inflation and low unemployment are strong indicators of future economic downturns. If the wages don’t match up with the rising inflation rate, it will lead to a reduction in the purchasing power of the consumers and, eventually, a recession.
8. Inverted Yield Curve
The yield curve is not the reason for recession but a great indicator to predict recession before 6 to 16 months. Generally, the yield curve slope turns negative before any recession hits.
Usually, the yield on long-term debt is higher than the short term, but when the yield on a long-term bond or debt declines below the short-term maturity bond is called an inverted yield curve or the negative yield curve. Occasionally, an inverted yield curve was a lead indicator of a recession.
Consumer Spending Data in 2022
Consumer spending is an economic term that refers to the money people spend on goods and services measured by the PCE Price Index. This can take the form of expenditures on food, clothing, transportation, entertainment, and other items. A rapid decrease in consumer spending is a signal of a recession.
The American economy is growing moderately, and some experts predict it will continue to do so soon. However, the growth is not translating into wage hikes for many Americans due to the steady rise in the unemployment rate. Rising Inflation may also fuel a decline in consumer spending habits.
U.S. consumer spending is projected to increase by an average of 2.7 percent per year over the next decade. This growth will be driven by a combination of strong population growth, substantial wage gains, and an improving economy that should lead to higher household incomes.
The rapid pace of change in the U.S. economy over the past few years has been fueled by improvements in labor market conditions, low interest rates, and a strong housing market. Those favorable factors will continue in the coming years, leading to faster economic growth and higher consumer spending.
By the end of 2022, U.S. consumer spending is expected to grow by an average of 4%. As the population continues to grow and incomes continue to rise, consumers will continue to be able to afford a wider variety of goods and services. As a result, consumer spending will be responsible for a large portion of the gross domestic product (GDP) growth.
Business Investment in the USA
Foreign direct investment (FDI) in the U.S. is expected to reach $1.3 trillion, up from $640 billion in 2015. FDI flows are projected to increase across all sectors, including construction, manufacturing, M&A, banking, and finance. FDI will account for more than 10% of total U.S. investment by 2022 as foreign companies continue to invest in existing operations or build new ones in the U.S.
Unemployment Rate in the USA
According to a recent report by the National Association for Business Economists, NABE, the current unemployment rate in the USA is projected to be around 3.9% in mid-2022. The unemployment rate has decreased significantly since its peak of 10% in 2009, but it remains high compared to other developed countries.
The major drivers of this improvement have been strong economic growth, growing job opportunities, and a declining number of people looking for jobs simultaneously. However, the unemployment rate could increase with significant economic fluctuations or more layoffs than usual.
According to the National Bureau of Economic Research (NBER), the economy is 70% likely to enter recession by the end of this year.
Furthermore, economic indicators such as factory orders, housing starts, and consumer sentiment have progressively worsened.
This suggests that the economy may be struggling and could enter a recession soon. If you are worried about whether or not we are headed for another recession, speak to your financial advisor to get an idea of what you should do to protect yourself from potential losses.
Housing Prices in the USA
Housing prices have declined in many parts of the country, especially in California and Florida. This could signal a more significant economic problem because it means people are losing money and may be unable to afford to buy a house or invest in other areas of the economy.
A decrease in stock prices
Determining whether the current stock market slump signifies a recession is difficult. Although experts anticipate that the S&P 500 will slide 20% from its current level, company earnings are not inspiring. If the U.S. economy goes into recession, the index will likely drop. Declining stock markets have been linked with recessions in the past.
It’s still too early to say for sure if this is what is happening now. Economists generally agree that a recession starts with business activity and spending declines, but it’s still too early to tell if we’re there. If stocks continue to decline and the economy weakens further, we will likely be headed for a recession.
A decrease in oil prices
The global economy has been in a recession since December 2007. A decrease in oil prices could signal the beginning of a new economic downturn, as the oil industry accounts for around one-fifth of world GDP.
The price of Brent Crude, the world benchmark, fell below $100 per barrel in the first week of July 2022 for the first time since April. The same week, West Texas Intermediate (WTI) crude price, the U.S. benchmark, dropped to $98.53 per barrel. Economists anticipate a significant decline in gas prices in the coming weeks. Significant reduction in oil prices is one of the warning signs for an upcoming recession.
High Inflation Rates
The rising inflation rate is another leading economic indicator of a potential recession. The inflation rate was around 8.58% in May 2022, rising to 9.06% in June 2022.
Inflation rates have been on the rise in recent years, which has caused some economists to say that we are entering into a recession. Policies must be implemented to decrease the amount of money created or increase demand for goods and services to prevent a full-blown recession.
Inverted Yield Curve
Currently, the yield curve is inverted as the short-term yields are higher than 2.98% for a 10-year yield.
The inverted yield curve is a technical indicator that reflects investors’ expectations about future interest rates. When short-term yields are higher than long-term yields, investors expect the Federal Reserve to raise interest rates (Federal Funds Rate) in the future. When short-term yields are lower than long-term yields, investors expect the Federal Reserve to lower interest rates in the future.
The global recession is coming and will have far-reaching effects on economies worldwide. While there is no definitive answer to when the recession will officially begin, many experts predict it could start as early as this quarter. We already see signs of economic weakness in several key markets worldwide.
This includes both developed and developing countries. For example, home sales are down significantly from last year in the United States, and manufacturing activity has slowed considerably.
In addition to affecting individual economies, the global recession will significantly impact global financial markets. In particular, banks and other financial institutions worldwide are expected to experience significant revenue losses due to decreased spending by consumers and businesses. This could lead to further declines in stock prices and increased bank loan defaults – both of which would negatively affect the overall economy.
So far, there is no clear indication that the global recession is imminent – but that doesn’t mean things won’t change soon. With so many factors working against us (including an unstable international economy), it’s impossible to say precisely when or how things will start.
The world economy survived the pandemic recession and the Great Recession in 2008. This time, economists hope not to have a more significant financial crisis than the last.
Recession v/s Inflation
A recession is a downshift in economic activity that results in a decline in GDP growth. It is a condition where the GDP shrinks for at least two consecutive quarters. In contrast, Inflation is an increase in the general price level (measured by the consumer price index) over time. In an economy with Inflation, there is a tendency to spend more than one earns because of rising prices.
In an economy without Inflation, people tend to save more than they spend because they can afford it. People are likelier to spend less and save more when an economy goes through a recession. This means that people spend less money on goods and services, which leads to fewer sales and less revenue for businesses. When an economy experiences Inflation, people tend to spend more money on goods and services because of rising prices.
This means that companies make more sales and generate more revenue than usual. In short, when an economy goes through a recession, people save money instead of spending it. On the other hand, when an economy experiences Inflation, people spend more money on goods and services instead of saving it.
Both recession and Inflation can have severe impacts on individuals and businesses. For example, during a recession, people may lose their jobs or have their wages reduced. This can lead to reduced household income and spending and further economic decreases.
Inflation can also have similar effects on individuals and businesses. For example, when Inflation increases the cost of goods and services, it may make it harder for people to afford those goods and services, or it may cause businesses to reduce their prices for fear that they will not be able to sell their products at all.
Recession v/s Depression
The terms “recession” and “depression” are often used interchangeably, but there is a big difference between the two. A recession is a tentative downfall in economic activity, while a depression is a long-term decline in economic activity.
A recession lasts about two years, decreasing production, wages, and consumer spending. Depression can last many years, resulting in widespread unemployment, poverty, and bankruptcy.