Economic conditions have experts arguing whether the U.S. is heading toward a recession or is already in one. Here's who makes the final call.

Simone Del Rosario Business Correspondent

Think a recession is 2 consecutive quarters of negative growth? Think again.

Jul 19, 2022

Simone Del Rosario Business Correspondent

By Simone Del Rosario (Business Correspondent), Dan Reardon (Editor)

Government data shows the U.S. economy shrank the first six months of 2022. With slowing growth, a bear market and ever-tightening Federal Reserve monetary policies, recession warning signs are flashing in many areas of the economy. Current conditions have experts debating whether the U.S. is heading toward a recession or is already in one.

At the very least, the probability of entering a recession in the next year has gone up considerably since the start of the year. And while the word “recession” can give people flashbacks to the harsh economic conditions stemming from the 2008 financial crash, that was coined The Great Recession for a reason, meaning not all recessions are as painful.

So what constitutes a recession and when does a recession become a depression?

Definition

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months.

Generally, people think of a recession as two consecutive quarters of negative economic growth, calculated by the country’s gross domestic product, or GDP. However, the official call about whether the U.S. is in a recession comes from the National Bureau of Economic Research, a private, nonpartisan organization made up of economists.

The NBER is clear that a 2-quarter GDP decline is not exact. In its eyes, a recession usually lasts for several months and is seen not just through GDP, but income, employment, industrial production and wholesale and retail sales.

The U.S. economy in 2022

The U.S. economy contracted the first two quarters of 2022, raising recession fears. In the first quarter, gross domestic product was -1.6%, and while it was mostly blamed on an unusually large trade deficit, new indicators and projections show the trend of a shrinking economy is continuing.

Then, on July 28, the Bureau of Economic Analysis announced second quarter growth also shrank by 0.9%, marking the second consecutive quarter of negative economic growth.

Many believe the Federal Reserve is playing a hand in triggering a recession with its belated efforts to tamp down four-decade high inflation. In June, consumer prices rose 9.1% annually, the highest since 1981.

“You know what’s worse than high inflation and low unemployment? It’s high inflation and a recession with millions of people out of work,” Sen. Elizabeth Warren, D-Mass., said to Federal Reserve Chair Jerome Powell during a Senate hearing.

However, unemployment is still near historic lows at 3.6% and the latest jobs report outperformed expectations. In addition, retail sales are strong, showing that despite inflation, the U.S. consumer is in decent health. That said, the Fed recognizes a recession is a possibility as it rapidly hikes its benchmark interest rate to cool economic demand amid painful inflation.

“The recession risks are going up, partly because monetary policy could have pivoted a little earlier than it did,” Cleveland Fed President Loretta Mester said on Face the Nation in June. “We’re doing that now by moving interest rates up.”

Recession vs. depression

While a looming recession can feel scary, the truth is, it’s a pretty normal part of the U.S. economy, which has longer periods of expansion and then shorter periods of contraction. The longest ever expansion followed The Great Recession and ended with the pandemic, spanning more than 10 years. Since 1950, recessions have happened on average about every six years.

What’s far less frequent is a depression, which is when an extreme global recession lasts years, not months. The Great Depression is the one example that comes to mind, which technically lasted from 1929 to 1933, though the economic effects dragged on much longer.

Now, central banks are quicker to step in during economic turmoil. Expansionary monetary policies like quantitative easing helped stop The Great Recession from becoming a full blown depression, and it’s unlikely the Fed will let a Great Depression happen again.

However, they might let the economy fall into a recession, especially if it means bringing down inflation.

What financial term do you want explained in our next Word On The Street? Comment with your suggestion.

NEWS CLIP: we think we’re in a recession.

NEWS CLIP: i think we’re either in a recession right now or going to be in one in the next 12 months.

SIMONE DEL ROSARIO: THE WARNING SIGNS ARE FLASHING.

NEWS CLIP: i think the likelihood of a recession is clearly increasing

SIMONE DEL ROSARIO: WITH A MARKET DOWNTURN – SLOWING ECONOMY – AND EVER-TIGHTENING FED POLICIES, EXPERTS SAY THE U-S COULD BE HEADING TOWARD A RECESSION – IF WE’RE NOT ALREADY THERE.

NEWS CLIP: we think the odds are sort of 50/50 now i mean they’ve increased materially since the beginning of the year.

SIMONE DEL ROSARIO: YOU MAY IMMEDIATELY THINK BACK TO HOW BAD IT WAS IN 2008. BUT NOT ALL RECESSIONS ARE AS “GREAT.”

SO WHAT CONSTITUTES A RECESSION? AND WHEN DOES A RECESSION BECOME A DEPRESSION?

LET’S GET INTO IT IN TODAY’S WORD ON THE STREET.

A RECESSION IS A SIGNIFICANT DECLINE IN ECONOMIC ACTIVITY SPREAD ACROSS THE ECONOMY, LASTING MORE THAN A FEW MONTHS.

GENERALLY, WE THINK OF A RECESSION AS TWO CONSECUTIVE QUARTERS OF NEGATIVE ECONOMIC GROWTH, CALCULATED BY THE COUNTRY’S GROSS DOMESTIC PRODUCT, OR GDP.

BUT THE OFFICIAL CALL ABOUT WHETHER WE’RE IN A RECESSION – ACTUALLY COMES FROM THE NATIONAL BUREAU OF ECONOMIC RESEARCH: A PRIVATE, NONPARTISAN ORGANIZATION MADE UP OF ECONOMISTS.

AND THEY SAY A TWO-QUARTER GDP DECLINE – IS NOT EXACT. IN THEIR EYES, A RECESSION USUALLY LASTS FOR SEVERAL MONTHS – AND IS SEEN NOT JUST THROUGH GDP, BUT ALSO INCOME, EMPLOYMENT, INDUSTRIAL PRODUCTION AND SALES.

THAT SAID, THE FIRST QUARTER OF 2022 – THE ECONOMY DID CONTRACT, RAISING RECESSION FEARS.

SENATOR ELIZABETH WARREN: you know what’s worse than high inflation and low unemployment? It’s high inflation and a recession with millions of people out of work.

SIMONE DEL ROSARIO: MANY SAY THE FEDERAL RESERVE’S BELATED EFFORTS TO TAMP DOWN ON INFLATION, COULD TIP THE COUNTRY INTO RECESSION.

WHAT’S MORE – THE FED SEES IT TOO.

CLEVELAND FED PRESIDENT LORETTA MESTER: the recession risks are going up partly because monetary policy could have pivoted a little earlier than it did :46 we’re doing that now by moving interest rates up.

SIMONE DEL ROSARIO: AND WHILE A LOOMING RECESSION FEELS SCARY – THE TRUTH IS – IT’S A PRETTY NORMAL PART OF OUR ECONOMY.

WE HAVE THESE PERIODS OF EXPANSION, AND THEN WE CONTRACT A BIT.

THE LONGEST EVER EXPANSION ACTUALLY FOLLOWED THE GREAT RECESSION AND ENDED WITH THE PANDEMIC.

ZOOM OUT – AND YOU’LL SEE SINCE 1950, RECESSIONS HAVE HAPPENED ON AVERAGE ABOUT EVERY SIX YEARS.

WHAT’S FAR LESS FREQUENT – IS A DEPRESSION.

THAT’S WHEN AN EXTREME GLOBAL RECESSION LASTS YEARS, NOT MONTHS.

THE GREAT DEPRESSION IS THE ONE EXAMPLE THAT COMES TO MIND, WHICH TECHNICALLY LASTED FROM 1929 TO 1933.

NOW, CENTRAL BANKS ARE QUICKER TO STEP IN. EXPANSIONARY MONETARY POLICIES HELPED STOP THE GREAT RECESSION FROM BECOMING A FULL BLOWN DEPRESSION. AND IT’S UNLIKELY THE FED WILL LET A GREAT DEPRESSION HAPPEN AGAIN.

BUT THEY MIGHT LET THE ECONOMY FALL INTO A RECESSION – ESPECIALLY IF IT MEANS BRINGING DOWN INFLATION.

NEWS CLIP: I don’t think it’s inevitable there’ll be a recession. I do think it’s tough to avoid a recession but it’s not inevitable.

SIMONE DEL ROSARIO: IN ANY CASE, YOU NOW KNOW WHAT IS A RECESSION. SO WHAT FINANCIAL TERM DO YOU WANT EXPLAINED NEXT IN WORD ON THE STREET. LET ME KNOW BELOW.