- GDP fell 1.4% last quarter
- A recession is a decline in economic activity, not just a decline in GDP
- On average, recessions last about 10 months.
It’s tempting to say that the United States is inching toward a recession, or already in one.
At least that’s the conclusion some economists drew from Thursday’s GDP report, which showed the US economy contracted at a seasonally adjusted annual rate of 1.4% in the first quarter of 2022.
This reading comes as inflation is at a 40-year high, forcing Americans to cut spending to stay afloat. However, unemployment is remarkably low. A sharp pullback in exports as a result of supply chain bottlenecks made the most significant contribution to GDP last quarter.
And a quarter contraction doesn’t necessarily mean a recession is coming.
What does a recession mean?
A recession means there is a significant decline in economic activity.
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There is an unofficial definition that two consecutive quarters of negative GDP means that an economy is in a recession. But the National Bureau of Economic Research, which gives the official call on when a US recession began and ended, says a significant decline in economic activity cannot be determined by GDP alone.
In general, a significant decline in economic activity is the result of several factors, including high unemployment, slowdown in goods produced and sold, and falling wages on top of negative GDP readings, according to the NBER.
What happens during a recession?
During a recession, many people tend to lose their jobs. Until they can find a new job, they often have to cut back or take on more debt to finance their expenses.
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For example, at the height of the COVID-19-induced recession, nearly 23 million Americans were laid off. This came as businesses were forced to close to slow the spread of the virus, and without customers, employers were unable to pay all of their employees.
How long does a recession last?
There have been 12 recessions since World War II that have lasted 10.3 months on average.
But there is a wide range. The most recent recession was the shortest in history: it lasted only two months, from February to April 2020. The previous recession, also known as the Great Recession, lasted 18 months.
Is a recession coming in 2022?
A recession is unlikely this year, economists say. But unlikely doesn’t mean it’s definitely out of the cards.
Deutsche Bank economists predict “we’re going to have a big recession” starting in late 2023 or early 2024. That marks a change in tone from last month, when economists predicted a “mild recession.” They said in a note published Tuesday that the recession is likely to be more significant as “it will be a long time” before inflation returns to the Fed’s 2% target.
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That means the central bank will need to take an even more aggressive stance on raising interest rates to curb inflation. But raising rates can backfire because it can cause consumers and businesses to spend less, since it becomes more expensive to borrow money when interest rates on mortgages, credit cards and other loans rise at the same time.
However, PNC Chief Economist Gus Faucher said “the US economy is nowhere near recession” in a note published after Thursday’s GDP report. “Underlying demand remains strong and the labor market is in excellent shape. Growth will resume in the second quarter.”
Elisabeth Buchwald is the personal finance and markets correspondent for USA TODAY. She can Ffollow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here
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