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How to Identify Signs of a US Economic Recession

by Joshua Brown
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Good news! The government said on Thursday that the economy is growing, not shrinking. Most economists think that things might get worse soon and there might be a recession in the upcoming April-June quarter.

The economy was doing really great in the first few months of this year because people were spending lots of money. But then people stopped buying and businesses bought less stuff towards the end of the quarter, which is still happening now.

The economy is facing a lot of troubles. The Federal Reserve has already made borrowing for people and companies more expensive by raising the interest rate to its highest level in 17 years. Prices are still going up, but at a slower rate lately.

Recently, two large banks collapsed and caused a new problem. Banks are now not giving out as many loans to people and businesses because they want to save money. This makes it hard for companies to get the money that they need to grow. The Federal Reserve (Fed) thinks that this could mean there will be a “mild recession” soon.

Even if there is a recession, it’s probably not going to be that bad. Most employers kept their workers around during the pandemic, even when business was slow, so they might do the same thing with a recession.

Usually, six months of bad economic times are seen as a sign of an economic recession. However, in today’s economy post-pandemic, things have been different. Even though the economy hasn’t grown in the first half of last year, jobs were still plentiful and the rate of unemployment was really low.

The economy has been difficult to predict ever since the start of the pandemic in March 2020. A lot of people lost their jobs, and it’s become hard for experts to tell what will happen.

Officials at the Federal Reserve want to stop inflation, which might mean that they are willing to put us into a recession if they think it is necessary. Most economists agree with them on this point.

So how likely is a recession? Here are some questions and answers about it:

Why are many economists predicting a recession to come soon?

The Federal Reserve has raised interest rates and inflation is going up. This makes it harder for people and businesses to spend money, which leads to business having to let go of employees. Even though most people have tried to keep spending the same despite those tough conditions, there are signs that people’s resilience is beginning to weaken.

Retail stores have been selling fewer items for two months in a row. The Federal Reserve is getting reports from shops around the US that customers are not willing to pay more for things.

People are having to borrow money with credit cards in order to buy the same amount of stuff as before, but this probably won’t last too long.

WHAT COULD BE SIGNS THAT A RECESSION IS STARTING?

The biggest sign of an upcoming recession would be when a lot more people start losing their jobs and when unemployment rises steadily. According to former Federal Reserve employee Claudia Sahm, every time since World War II, whenever the number of unemployed people increases by 0.5 percent over a few months, it indicates that there’s going to be a recession soon.

Every week, economists track how many people apply for unemployment money – this tells us if businesses are cutting jobs or not. Recently, lots of businesses from Meta (Facebook’s parent company), 3M, and Lyft have all announced that they need to lay off people.

Even though there were job cuts, employers still added 236,000 more jobs in March and the number of unemployed people actually went down from 3.6% to a very low 3.5%!

Do you know any other signs that economists use to predict a recession? Well, one of them is called an “inverted yield curve”. This happens when the interest people get from holding a 10-year bond is lower than the interest they receive from a short-term bond such as a 3-month T-bill. It’s usually not like this; typically, if you hold your money for longer, you’ll get more money out of it.

When the yield curve is inverted, it usually suggests that investors think a recession is coming. Even though a recession takes some time – usually 18-24 months – to arrive after an inverted curve, they often appear strangely before these tough times.

Since last July, the interest one earns when investing in two-year US Treasury bonds is greater than that earned on ten-year bonds. That’s a sign something bad might happen soon – people think a recession will start. Further, if you look at the interest paid on three-month bonds compared to ten-year bonds, it’s higher – this “inversion” is like a super warning that suggests a recession could be coming any time now.

An organization made up of economists called the National Bureau of Economic Research (NBER) officially decides when a recession begins. The NBER’s Business Cycle Dating Committee thinks a recession is when the economy takes a major drop and this lasts for more than just a few months.

The committee looks at a lot of facts in order to figure out if there is a trend in hiring. This data includes how much money people make, how many people have jobs, how much people are spending after taking inflation into account, and how much stuff factories are producing. The amount of money that people make without government help like Social Security gets special attention.

But usually the NBER (National Bureau of Economic Research) doesn’t say there is a recession even though one may be happening until some time later – sometimes as long as a year.

DOES HIGH INFLATION TYPICALLY LEAD TO A RECESSION?

Inflation in 2006 was 4.7%, which was the highest in 15 years. But when it gets too extreme, like 9.1% as it did last year, a recession is probably coming. (This higher rate was the most it’s been since 1980!) The 2008-2009 recession wasn’t because of inflation– instead, it was caused by the burst of housing prices.

The Federal Reserve (Fed) will raise the cost of borrowing when the prices go up too much. This means that buying things like houses, cars, and other big things become harder to afford and it could even cause a slow-down in the economy.

Inflation can greatly be an impact on the economy. People will end up spending a lot less, due to rising prices, and businesses become uncertain about the future. So they do not expand as much or hire new people. This can cause some people to lose their jobs and not be able to find replacement work.

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