Is the US in a recession?
Rumors of a recession in the US have been swirling for months. Yet, as job reports roll in and experts change their forecasts, it’s difficult to tell exactly what’s going on with the economy. Let’s take a closer at what’s happening with the economy, what could happen in 2023, and what it means for you.
What is a recession?
A recession is a technical term that describes the shrinking of an economy. Typically, during a period of recession, businesses find it harder to stay afloat, employees often lose their jobs, and households focus on saving rather than spending. For these reasons, recessions are often bad for people and for businesses, and should they persist for long enough, recessions can turn into a more serious depression — an extended period of economic shrinking that can last for years.
But there’s a catch. There is no agreed-upon way of working out whether an economy is in a recession, and different organizations, analysts and people all have their own ways of measuring the health of the economy. There are some indicators, such as the employment rate, that give a good general picture of an economy’s health, but on their own don’t offer a complete picture.
There are some definitions that say that two or more quarters of negative Gross Domestic Product (GDP) signals a recession, while others say that only a prolonged period of significant economic decline that lasts for a few months can be defined as a recession. In the end, unless there is a major economic crisis, it isn’t always easy to work out whether there is a recession taking place or not.
Is the US in a recession?
According to some definitions, the US fell into recession in the summer of 2022, as during this time the economy shrank for two consecutive quarters. However, in the final quarter of 2022, economic growth was a solid 2.9 per cent, while in the third quarter, it was an even better 3.2 per cent. If the US entered a recession during the summer, it was certainly short lived.
Moreover, throughout 2022, businesses continued to create new jobs. During the period that the US supposedly dipped into a recession, the US economy actually completed its post-pandemic job recovery. In July, the number of people employed in the US returned to its pre-pandemic level, suggesting the economy was not actually in a recession. Again, it all comes down to how you measure a recession.
Right now, the US economy is not in a recession, however there are some growing signs we may be soon. Towards the end of 2022, the economy showed signs of slowing and the number of new jobs created also slowed — both of which suggest businesses are preparing for a downturn.
Why is the US heading for a recession?
Inflation rose rapidly across the US in 2022. And one of the main tools the Federal Reserve uses to combat price rises is raising interest rates. When interest rates rise, people have less money to put into the economy. In principle, this usually means that price rises start to slow before eventually decreasing to normal levels again.
But, with households saving rather than spending, economic growth also starts to slow. Should interest rates remain relatively high for long enough, it can trigger a recession, which is exactly the risk facing not just the US, but countries all around the world.
How long do recessions last?
Recessions can be painful for businesses and households alike. So, should a recession finally arrive, the question on everyone’s lips will be: Exactly how long will it last?
Unfortunately, there’s no way of knowing. Should the Federal Reserve decide to focus on bringing inflation back to normal levels, it’s possible that interest rates could remain relatively high until the second half of 2023. This doesn’t necessarily mean that the chances of a recession rise and fall with interest rates. But with inflation the most pressing concern facing policy makers, it is likely that there is a correlation between the level of inflation, resulting interest rates and ultimately the chances of a recession.
In the end, nobody knows how long a recession in 2023 could last. And with the economy having defied predictions so far, there is of course no guarantee any predicted recession will come to pass at all.
Could the US trigger a global recession?
The US economy makes up 30 per cent of the global economy, and so even small recessions here can have an impact on businesses and countries elsewhere.
And much like the US, the global economy is also on the brink of a recession in 2023 according to leading global organizations. Should the US economy start to shrink and consumers buy less, businesses around the world that export to the US will also feel the consequences. The US economy on its own may not trigger a global recession, but given its size and importance to the rest of the world, the fortunes of the US economy can create ripple effects for others.
How can you protect your money during a recession?
Recessions can be painful for your finances, but this isn’t to say that you can’t protect your money. Depending on your financial circumstances and risk appetite, there are a few steps you can take:
Focus on cash saving: During recessions, it’s an unfortunate reality that people will lose their jobs. Should the worst happen, make sure you’re prioritizing your cash savings that can provide an important safety net if you need it.
Reduce your outgoings: As part of building up your savings, you should take a close look at your outgoings. Consider whether you can reduce some of your expenditures to protect your money.
Keep contributing to your pension: Cutting back on your pension contributions can leave you with significant shortfalls in your retirement planning. Keep contributing to your pension funds so as not to miss out on the rewards later on.
Speak to a financial advisor: Financial advisors can help you adjust your financial plans during difficult times, while still helping you strive towards your goals.
With a recession forecast, now is a good time to reassess your financial circumstances and to make adjustments that will protect your money. Find a financial advisor who can help on Unbiased.
Craig Rickman is senior content writer at Unbiased. He has been writing about personal finance and wealth management since 2016, including four years as a journalist at the Financial Times Group. Prior to this, Craig spent eight years working as a regulated financial adviser. He holds the CII level 4 Diploma in Financial Planning.