Is the U.S. officially in a recession? GDP report paints a bleak picture
- GDP fell by 1.4% last quarter
- A recession is a decline in economic activity, not solely a decline in GDP
- On average, recessions last around 10 months
It's tempting to say the U.S. is inching toward a recession, or it's already in one.
Stocks recently hit the lowest levels since the onset of the pandemic when the economy fell into a recession. Now, to add to the pain, the U.S. economy contracted for the second quarter in a row.
This reading comes as inflation is at a 40-year high, forcing Americans to cut back on spending to stay afloat. Yet unemployment is remarkably low. The 0.9% contraction last quarter was driven primarily by a sharp decline in business inventories, government spending, and residential and non-residential investments.
But the contraction doesn't necessarily mean a recession is on the way.
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What does a recession mean?
A recession means there's a significant decline in economic activity.
There's an unofficial definition that two consecutive quarters of negative GDP mean an economy is in a recession. But the National Bureau of Economic Research, which gives the official ruling on when a U.S. recession started and ended, says a significant decline in economic activity cannot be determined solely by GDP.
Generally, according to NBER, a significant decline in economic activity results from several factors, including high unemployment, a slowdown of goods produced and sold, and wages falling in addition to negative GDP readings.
What will a recession mean?
During a recession, a lot of people tend to lose their jobs. Until they're able to find a new job, they often have to cut back on spending or take on more debt to finance their expenses.
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For instance, 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 curb the spread of the virus. Without customers, employers couldn't afford to pay all their employees.
What happens to stocks during a recession?
The S&P 500 entered bear market territory in June, meaning it declined by 20% decline from its peak level in January. But the index is on pace for its best month of 2022. That may be quelling some worries that the U.S. is headed for a recession, even though bear markets alone don't mean the economy is in a recession.
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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.
How long does a recession last?
There have been 12 recessions since World War II that lasted 10.3 months on average.
But there's a wide range. The most recent recession was the shortest ever– lasting just two months, from February to April 2020. The prior recession, also referred to as the Great Recession, lasted 18 months.
Is a recession coming in 2022?
It's unlikely that a recession will occur this year, economists say. But unlikely doesn't mean it's definitely out of the cards.
For instance, Goldman Sachs sees a 30% chance of a downturn over the next year while Wells Fargo predicts a mild recession in early 2023.
Deutsche Bank says "a recession is almost a slam dunk over the next 12 months."
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