Credit Sesame explores whether the US economy is in a recession.
The possibility of recession had already been looming in the background for much of 2022. On July 28, that possibility jumped front and center in discussions about the US. economy.
That’s the date when the Bureau of Economic Advisors announced that the US economy shrunk in the second quarter of 2022, after adjustment for inflation.
This followed a decline in GDP during the first quarter. Those back-to-back poor quarters for the economy led many commentators to cite a popular rule of thumb that two consecutive quarters of GDP contraction equals a recession.
The problem with that rule of thumb is that it’s not necessarily so. As of yet, whether or not the economy has slipped into recession remains very much in question.
Still, even if this is not a recession, consumers face a challenging economy. High inflation is bad enough. High inflation with a slowing economy is even tougher.
What exactly is a recession?
The National Bureau of Economic Research (NBER) defines a recession as the period from a high point in economic activity to the next low point. The NBER is the organization that officially measures economic cycles, which include expansions and contractions. An expansion is a period when economic activity is increasing, and a contraction is a period when it’s shrinking.
Economic activity goes up and down all the time. To define which of those downturns should be considered a recession, the NBER takes into account three things:
- The depth of the contraction. Even if a decline in economic activity is very brief, if it’s severe enough it can have a big impact.
- How widespread the contraction is. Different segments of the economy have ups and downs at different times. A recession is a period when a downturn affects many parts of the economy at once.
- How long a contraction lasts. Sometimes a recession isn’t very severe, but by lasting for an extended period it can wear on consumers and businesses
The belief that a recession is two consecutive calendar quarters of an economic decline is a common misconception. The NBER’s methods aren’t so simplistic, because economic setbacks come in different shapes and sizes.
For example, at the onset of the COVID pandemic, the US economy came to a sudden standstill. In March and April 0f 2020, employment shrunk by nearly 22 million people. While the job market started to bounce back quickly, such a severe setback for the economy could not be ignored just because it didn’t last long. So, that period is officially considered a recession.
In contrast, a decline in economic activity that lasts for six months doesn’t always have as great an effect. A very mild decline can drag out for several months without having a very deep impact.
So, even though the economy has declined for two consecutive quarters, it remains to be seen whether this will be officially declared to be a recession.
Bad signs and good signs for the US economy
The reason why it’s unclear whether or not we are in a recession is that there are both positive and negative trends for the economy.
Certainly, consecutive quarterly declines in GDP is troubling. However, those declines were very slight. In fact, before adjustment for inflation, the economy actually grew in each of the first two quarters.
Treasury Secretary and former Fed chair Janet Yellen commented recently that she does not believe the economy is in a recession. A prominent reason she cited was the fact that the job growth remains strong.
In fact, the US added jobs in each of the first six months of this year. The total employment increase over that period was more than 2.7 million jobs. Employment is a key indicator to watch to see if this strength continues.
Recession or no recession – what we know for sure
So, whether the economy is technically in a recession is open to debate. However, one thing we know for sure is that high inflation is putting a strain on people’s budgets.
Since GDP growth is usually measured after adjustment for inflation, spending has to grow rapidly to keep up with fast-rising prices. It remains to be seen whether household budgets can continue to keep up with rising prices.
Between rising prices and higher interest rates, at some point consumers may not be able to afford to keep the economy growing. Already, consumers are having to make adjustments.
Financial moves for a high cost/slow growth economy
Here are some of the adjustments you should consider in an environment of high inflation and slowing growth:
- Cut spending where possible. Inflation may force some things out of your budget. Plan carefully to make sure you can afford the things you need the most.
- Shop carefully. Fast-changing prices mean there may be wider variance in prices at different retailers. Make sure you do some comparison shopping online before you buy.
- Consider cheaper substitutes. Whether it’s buying a cheaper cut of meat or using store brands instead of national ones, you may be able to find cheaper alternatives for some items.
- Use credit less. Higher interest rates make borrowing more expensive. The less you borrow, the more of your budget can go to actually buying things rather than to paying interest.
- Take good care of your credit. Diligent payment habits can help you improve your credit score. This could reduce your cost of borrowing, since people with good credit generally pay lower interest rates.
The US economy may have more surprises in store in the months ahead, including the possibility of recession. Already, high inflation and weakened growth pose a significant challenge. It is a good idea to make a conscious effort to adapt your financial habits to meet that challenge.
You may also be interested in:
- Which States May be Closest to a Recession?
- Most Americans are Losing the Inflation Battle
- Recession and Inflation as Threats to Personal Finances: Which is worst?
Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.
