How could a modest downturn happen? The past two recessions were sparked by shocks to the economy – a housing crisis and a pandemic. A downshift could be triggered by the delayed effects of the Fed's 5.5 percentage points in interest rate hikes since early 2022, a campaign aimed at taming soaring inflation.
Many economists are expecting growth to slow to less than 2% next year, so it wouldn't take all that much to nudge the economy into a mild slump. If a recession does happen, how will it unfold, and what does it mean for everyday life?
What is a recession?
In simple terms, a recession is "a contraction in economic activity" or "when the economy shrinks," said Sameer Samana, senior global market strategist for the Wells Fargo Investment Institute.
To be more specific, a recession is "a significant decline in economic activity that spreads across the economy and lasts more than a few months," said Michael Pugliese, an economist with Wells Fargo.
In determining whether a recession has occurred, the nonprofit National Bureau of Economic Research doesn't just look at GDP but rather at a variety of indicators such as employment, consumer spending, retail sales and industrial production.
When it comes to defining a recession, it could be a technical recession or a true recession, said Samana.
"The biggest distinction is the severity," he explained. "A technical recession is more of a mathematical downshift. A true recession is a more meaningful contraction across a broader range of categories."
Will there be a recession in 2024?
Though economists have been forecasting a recession for a while, we almost certainly aren't in one now. And while growth is expected to slow significantly next year, inflation's recent pullback and Fed forecasts of 2024 rate cuts have lowered the odds of a slide. Keep in mind not even the best economists can predict with certainty when the next recession will begin.
But for now, the unemployment rate is still historically low at 3.7%. The job market is still solid despite a recent slowdown.
As for recession odds, some believe we can expect a recession to begin later in 2024 than they initially predicted. Economists say there's a 47% chance of a downturn in 2024, much lower than the 60% odds they gave earlier this year, according to forecasters surveyed by Wolters Kluwer Blue Chip Economic Indicators.
A mild recession could cost the economy as little as a few hundred thousand jobs or up to 1.8 million jobs if the nation’s gross domestic product, or economic output, declines 1.2%, and the unemployment rate rises from a 50-year low of 3.5% to 5.4%.
What is a severe recession?
A severe recession could mean 3 to 4 million job losses, a 2% to 2.5% decline in GDP, and a 7% unemployment rate. The "Great Recession" lasted from December 2007 to June 2009, which was the longest economic downturn since World War II, according to the Federal Reserve.
During a recession, the economy shrinks as a result of a pullback in spending, mostly by consumers and businesses.
"Consumption, consumer spending makes up about 70% of the U.S. economy," Samana said, explaining that during a recession, the cutback in spending "then feeds into overall demand for services."
From this, companies can pull back on the number of people they employ, further contributing to the contraction of economy activity. Unemployment often rises during recessions, and total employment levels can flatline or turn negative, said Pugliese.
In addition, GDP growth tends to shrink during recessions because there's less consumer demand and fewer employees, leading to lower production of goods and services.
"If you have fewer employees, all else equal, you're going to potentially produce less in a recession," Pugliese said. "All of these things are tied together. Most of those indicators are either slowing down in growth terms, or in many cases, contracting."
Wages are also affected by recessions, said Samana.
"It's harder to argue for wage increases," he explained. If unemployment is high, employers could deny the salary request and claim a worker could be replaced by someone else for a lower wage, instead of a higher one.
Much like other goods and services, housing prices also can decrease during a recession, he said.
What about layoffs if a recession happens in 2024?
There’s little doubt there would be some pain as hundreds of thousands of workers likely lose their jobs. Already, a wave of tech layoffs has hit that industry.
As a result of those job losses, those still employed will worry they might get laid off themselves and pull back spending. And the hottest job market on record will continue ti cool off, leaving workers with fewer opportunities and putting a damper on job hopping.
But don’t expect the trauma of the past two recessions, which each threw millions of people out of work. Yes, the job market will almost certainly weaken in the coming months, but it probably won’t come to a standstill, economists say.
Employers added a sturdy 199,000 jobs in December 2023, though job growth has slowed from a monthly average of more than 400,000 in early 2022.
How long do recessions last?
To be categorized as a recession, an economy must experience a couple of back-to-back quarters of shrinking output, said Samana.
However, there is no definite timeframe for how long a recession must last, and the length of a downturn can , explained Pugliese.
"You can have some that are very short and quick. You could have others that are a lot more long-lasting."
Who suffers the most during a recession?
Anyone can be impacted during a recession, said Samana, such as lower-income people or unskilled laborers.
It is hard to generalize that one group may experience a greater impact more than others, said Pugliese. During the 2020 recession due to COVID-19, the hardest hit industries were leisure and hospitality, but in the 2001 recession, the tech industry struggled, he explained.
"I think it just depends a lot of what's driving the slowdown in the first place," said Pugliese.
What happens to inflation during a recession?
Historically, when the economy has slowed, inflation appears to remain high.
But as a recession sets in, inflation will begin to fall. This can occur after a quarter or two of economic contraction, said Samana.
"The tricky part this time around is how much does it come off," he said. "How it should work is the economy would need to roll over first; people would need to feel the impacts of that rollover. They'll probably start to rein in their spending, which will then start to filter into those prices."
What should you buy before a recession?
It’s not a bad idea to stock up on household goods and shelf-stable foods now while you still have a regular paycheck if you’re afraid you won’t have one in a couple of months. But make sure to not get carried away.
You may also want to try to pay off as much debt as possible, particularly any high-interest debt.
What should you avoid doing in a recession?
In a recession, spending should be monitored. Try to avoid frivolous spending and going off budget.
Additionally, if possible, try to avoid taking on more debt.
