What does being in a recession mean? And is the U.S. officially in a recession?
- The odds of the U.S. going into a recession are rising
- During recessions a lot of people get laid off
- Stocks tend to plunge during recessions but it could create a good buying opportunity
The odds that the U.S. economy will go into a recession are increasing after two consecutive negative quarters of GDP.
Economic growth in the second quarter declined by 0.9% after dropping by 1.6% in the first quarter of this year. Inflation hit a new 40-year high last month, prompting the Federal Reserve to raise its key interest rate by an additional 75 basis points. But that may help fuel a recession if it causes unemployment to tick back up and spending to fall.
Yet a recession isn’t necessarily right around the corner, depending on who you ask. Still, with all the talk of a possible recession, you may be wondering how it could affect you.
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Fed Chairman Jerome Powell said he doesn't "think the U.S. is currently in a recession."
"The reason is there are just too many areas of the economy that are performing too well," Powell told reporters on Wednesday after the rate hike announcement.
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A recession isn’t determined by a negative quarter of GDP or even two for that matter. Rather, it’s a significant decline in economic activity resulting from several factors, including high unemployment, a slowdown of goods produced and sold, and wages falling in addition to negative GDP readings. That’s according to the National Bureau of Economic Research, which gives the official ruling on when a U.S. recession started and ended.
However, every recession NBER declared since 1947 occurred when there were two consecutive negative quarters of GDP, according to an analysis by Deutsche Bank's Jim Reid.
Like Powell, Reid said his team of economists at Deutsche Bank aren't convinced the U.S. is in a recession yet. "We still think a recession is almost a slam dunk over the next 12 months but want to see more evidence of employment rolling over before we would call the current U.S. environment a recession," he said in a note published Thursday.
What happens to stocks during a recession?
The S&P 500 is officially in a bear market, meaning it has declined at least 20% from its January peak.
Bear markets "are almost always associated with a recession," said Matt Stucky, senior portfolio manager at Northwestern Mutual. The one exception was Black Monday when the S&P 500 fell into bear market territory in one day. But the economy wasn't in a recession.
On average, the S&P 500 loses 32% of its value during recessions, according to research published by RBC Wealth Management.
“Whether it’s a recession or just a significant slowdown, I would expect to see reduced enthusiasm for investing by individual investors,” said Kristina Hooper, Invesco’s chief global market strategist.
"However, stocks tend to move in advance of the economic cycle, so we could soon start to see investors sniffing around and starting to move back into equities on expectations of a stock market rebound," she said.
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Even though she doesn’t believe the U.S. economy is due for a recession she said that high inflation is already creating that effect since “there is, in general, less money available for households to invest.”
If you can afford to keep some money in the stock market during a recession you should, Hooper added. “The biggest mistake investors made during the Global Financial Crisis was to get out of stocks at the bottom, locking in their losses and missing out on some of the dramatic rebound that occurred.”
What happens to employment during a recession?
During a recession, a lot of people tend to lose their jobs. For instance, in the last recession, more than 22 million people were laid off. People who keep their jobs during a recession may have their hours and or commission rates reduced.
Employers also tend to cut back on bonuses and raises during a recession.
“There won’t be the same bargaining power you’d want,” said Greg McBride, chief financial analyst at Bankrate.com. That’s a stark difference from what workers experienced over the past year during the Great Resignation.
“The common wisdom is that even in a recession, you have to get your haircut. Now it turns out that if a recession is caused by a pandemic, you cut your own hair,” said Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Brookings Institution. That is to say that typically service sector jobs are less sensitive to economic downturns.
Manufacturing jobs and ones dependent on consumers making big purchases are especially vulnerable in recessions since consumers tend to postpone them.
For instance, if your washing machine breaks during a recession, you may put off buying a new one and instead “bang it to get it to run for the next few months until you feel more secure that you’re not going to get laid off,” she added.
Health insurance coverage
Most of the U.S. population had employment-based health insurance in 2020, according to Census Bureau data. One study published by the Commonwealth Fund estimated that 7.7 million Americans lost employment-based insurance that covered 6.9 million dependents from February to June 2020 after being laid off.
If you lose your employment-based health insurance, you usually have 60 days to decide if you want to continue with the same health plan through COBRA. But with COBRA you pay the full cost of your health insurance plan, including the portion your employer may have been footing. Or you can buy a new health insurance plan through the government’s Health Insurance Marketplace.
In past recessions, many people who lost employment-based health insurance remained uninsured until they were rehired.
Do banks give out loans during recessions?
During recessions, lenders have to be more selective about borrowers because there’s a greater risk that they will default. For example, lenders are more likely to question your job security since it’s riskier to lend to someone who could be laid off.
That could make it harder for you to get a loan or a new credit card. And for consumers whose FICO credit score is below 670 lenders are more likely to tack on higher interest rates, said McBride.
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That’s why it’s a good idea to start working on improving your credit score now so you can get access to credit you may need if there is a recession. You can do this by paying off debt, paying bills on time, and paying off some of your credit balances so you can lower your credit utilization rate.
And if you’re not sure what your credit score head to annualcreditreport.com, where you can get a free weekly report. Typically, these reports are free only once a year, but the three major credit reporting agencies are providing free weekly reports through December 2022.
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Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here