It’s been more than 10 years – a record long time, in fact – since the U.S. economy experienced a recession. More signs are popping up that another one could be on the horizon.
The upside is that most economists don’t expect this next downturn, whenever it should occur, to be anything like the Great Recession, which broke records for length and severity. But typical downturns are no picnics, either.
This is what typically happens during one, and why the next one isn’t expected to be like the Great Recession.
The loose definition of recession is two straight quarters of declines in real gross domestic product, the broadest gauge of U.S. growth.
But the official declaration comes from the National Bureau of Economic Research, a private organization of economists, which determines a recession occurs when there is “a significant decline in economic activity” that lasts more than “a few months.”
The organization considers the following economic measures for determining a recession:
- Employees on non-farm payrolls
- Personal income minus transfer payments
- Industrial production
- Manufacturing and trade sales
The NBER declares a recession retroactively, though. For instance, it didn’t confirm the Great Recession until November 2008, 11 months after it had begun.
Economists look at leading economic indicators to predict when a recession is coming. One of those is the inverted yield curve, the signal that occurred this week in the bond market and sent stocks into a tizzy. That’s when the yield on the 10-year Treasury bond sinks below the yield on the two-year bond.
But the inversion only indicates a recession is coming. It doesn’t predict when it will arrive, says Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.
“The time from inversion to onset of a recession is long and variable,” she says. “It ranges about 10.5 months to 36 months.”
Other leading indicators economists watch are an increase in initial jobless claims, how consumers view business economic activity as measured by consumer confidence surveys and new manufacturing orders. Housing permits once were considered a good indicator, but not this time.
“It’s out of norm because of structural challenges lingering from the last recession,” Bostjancic says.
What happens in a recession?
Stripping out the Great Recession – which Moody’s Chief Economist Mark Zandi calls a once in a 50- or 100-year event – recessions since the end of World War II lasted six months to 16 months, averaging 10.4 months. The Great Recession was longer at 18 months.
Jobs: During a recession, jobs disappear. The largest monthly decline in employment in the last 10 recessions – excluding the big one – was 2.6% on average.
Generally, the biggest losses are in manufacturing and related industries, says Zandi. Sectors that rely on more discretionary spending, such as leisure, hospitality and retail, all will lose jobs.
Employment in financial industries will shrink, too, because businesses and individuals borrow less. Jobs in construction, tech, media and entertainment also tend to pull back.
But there are some jobs that weather downturns without much losses, Zandi says, like those in health care, professional services like legal and accounting, government and education.
Even if you keep your job during a downturn, you may not get a raise or bonus. Your hours and wages may be reduced, too, Zandi says.
Stocks: While stocks tank during a recession, they bounce back quicker. Typically, the stock market begins to fall from its peak months before the actual recession starts. It also starts to recover before the recession technically ends.
Take the dot-com era.
That recession started in March 2001, but stocks had already peaked 14 months prior. The Dow fell 11% before the recession even began, on its way to a 30% rout at its worst, when it bottomed in September 2001. The recession didn’t end until two months later, a period in which the Dow rallied 20%.
During the official downturn – from March through to November 2001 – the Dow fell 5.7%. The Dow increased 6.8% and 7.4% during the 1980 and 1981-82 recessions, respectively.
Because the banking system is on much more solid footing and household debt remain reasonable, the next recession will be more the “garden variety,” says Zandi, “and nothing like the Great Recession.” He predicts it will last six to 12 months and the unemployment rate will tick up two to three percentage points.
What could make it worse is the lack of fire power to counter a downturn. The Federal Reserve typically chops off 5 percentage points from the federal funds rate during a recession to boost the lending. But that rate is less than half that, says Bostjancic.
“So, they have limited monetary policy ammunition, and that’s the big worry,” Bostjancic says, “not just here, but also across the world.”
Recent reports also suggest that the Trump administration has yet to consider a response to a possible recession.
“It’s hard to imagine Trump admin and Congress getting it together fast enough to make any meaningful difference,” Zandi says. “This could be a one-in-10-year recession, but could go to one-in-25.”