The term recession refers to a significant economic downfall in a particular region. When two consecutive quarters of GDP growth are negative, a recession is officially recognized and declared. In simple words, a downturn in economic activity causes a recession. In the USA The National Bureau of Economic Research declares a recession, and in India, it is the Reserve Bank of India.
Now as you know ‘what is a recession?’ You should also know what happens in recession, as evident from the recession definition, a recession is an economic downturn. And as the economy slows down it makes our daily life challenging too. Resulting in higher unemployment, lower wages, and loss of jobs, which makes our daily life much more difficult.
What is inflation?
The rate of price increases over a given period of time is called inflation. In other words, inflation represents an increase in the cost of living in a country.
The two most widely used inflation indexes are the Consumer price index-based inflation rate (CPI Index) or Wholesale price index-based inflation rate (WPI Index). CPI indicated the price increase of all commodities in the consumer market, on a year-on-year basis or monthly basis. On the other hand, WPI indicates a price increase in the wholesale market.
Now the question is, ‘can inflation cause recession?’ inflation and recession are very closely related, although inflation is not the main cause of economic declines, very high inflation (especially if it is cost-push inflation) can result in a recession.
What is shrinkflation?
Shrinkflation is like hidden inflation. Rather than raising the price of a product, manufacturers often reduce its quantity (or quality), so that customers do not notice the change easily. But what causes shrinkflation? producers often use shrinkflation to deal with increased manufacturing costs, higher market competition, etc.
The greatest example of shrinkflation is Coca-Cola. In 2014 they reduced the size of their larger bottle from 2L to 1.75L while keeping the price the same.
How can a recession affect the stock market?
Stock prices depend on several factors, the major one is the health of the nation’s economy. When the economy is healthy, consumer and business spending increases and so do the stock prices. On the other hand, when the economy slows down consumer and business expenses reduce and a stock market crash occurs.
Market crash history shows that stock market prices decline drastically for a few months before and during a recession and it starts to climb the heights just before the economy begins to recover. This phenomenon is clearly evident in the stock market crash 1929.
But why did the stock market crash in 1929? In 1929 people sold their properties (liberty bonds, and real estate), and in some cases, they borrowed money to buy stocks, which pushed the stock prices to an unsustainable level.
Companies invested that money to boost their production. It caused a huge overproduction and in mid-1929 the economy was stumbling because of it and that is what caused the stock market crash of 1929.
Does the stock market crash before a recession?
Two of the most asked questions about the stock market are; ‘Can the stock market crash?’ And ‘Why did stock market crash?’ Every time the economy gets weaker, the stock market faces a downfall.
That is why stock markets often crash before and during a recession. Also, just before recessions end, the market flourishes which is also called economic expansion.
During a recession, one will often observe: that investors have become too cautious about their investments. They keep their eyes pinned on the current news and in many cases they pull their entire money out of the stock market without taking any time to consider why did market fall today.
The most recent example is the stock market crash 2021, which occurred during the covid recession. During this period, dow jones dropped by 30%+, and S&P 500 dropped by 12%.
Smart investors also take advantage of the recessions, keeping their eyes pinned on the market, they thoroughly analyze why market is down today? and when it is going to rise? And when the economy is about to recover, they buy stocks at lower prices and sell them with higher profits when the stock prices are higher.
Why share market is going down in 2022?
The s&p 500 stock index has already declined nearly 20% in May 2022. The situation of the nasdaq composite is even more severe, it has dropped by nearly 34%. But why share market is going down?
The reasons are many; rapid increase in interest rates, the disruption of the supply chain caused by the COVID pandemic, Global tension, China’s brutal economic strategies, and the recent increase in oil prices are the reasons why share market is going down in 2022.
What signals a recession?
Economists consider recessions as a part of the economic cycle graph. Studies show that recessions seem to appear every decade or so and can last for a few months to some years. The shortest recession known as the covid19 recession lasted for 2 months (Feb 2020 to Mar 2020). The longest recession is also known as The great recession (December 2007 to June 2008) and it lasted for 18 months. You can get a clear picture from the graph given below.
Now we know; what is recession? And what causes a recession, but how can we predict a recession? There are signs of economic collapse that help the experts to foresee the next financial crisis.
- Declining GDP:
GDP or gross domestic product shows the activity and the value generated by a particular economy. If the GDP of two consecutive quarters shows negative growth, it is declared that the particular economy is in recession.
In the first quarter of 2022 US GDP shows a negative growth of 1.4% which is mostly caused by a decline in private investments and a downfall in exports and government spending.
- Inversion of the yield curve:
An inverted yield curve is one of the greatest recession indicators. It happens when the interest rate of short-maturity bonds exceeds the interest rate of long-maturity bonds. Since 1970’s recession a negative yield curve has always been spotted before every economic downfall.
- Stock market crash/correction:
Stock market crashing is another indicator of a recession. It indicates that people are losing faith in the country’s economy. For example, prior to 6 months of the great recession, the S&P 500 showed a -2 decline.
But what is market crash? A rapid and unexpected drop in stock prices is called a market crash or stock crash.
- Decreasing real income:
To calculate real income, we take personal income, adjust it for inflation, and discount social security measures. A decrease in real income weakens the purchasing power making the economy weaker.
- Poor growth of manufacturing sectors:
An economy’s self-sufficiency can be measured by the growth of its manufacturing sector (overall imports and exports). During the great economic depression of 1929, the negative growth in the manufacturing sector affected approximately one-tenth of US GDP, and during the 2008 breakdown, US GDP shrank by 4.2% which is the worst economic downturn since the great depression.
- Increased unemployment:
Increasing unemployment is a lagging indicator of a coming recession. It is often considered as ‘What happens during a recession’ rather than an indicator of it. Usually, an unemployment rate above 6% is considered problematic.
What are the past histories of recession?
The history of recessions shows that a recession occurs every three and a half years. From 1900 to 2020, there have been several instances of financial recessions. The following are some highlights.
How long did the recession last?
After the previous recession
|Sep 1902 to Aug 1904 (1 year 11 months)||1 year 9 months||
|recession of 1907 or Panic of 1907||May 1907 to June 1908 (1 year 1 month)||2 year 9 months||
|panic of 1910 to 1911||Jan 1910 to Jan 1912 (2 years)||1 year 7 months||
|1913 to 1914 recession||Jan 1913 to Dec 1914 (1 year 11 months)||1 year||
|recession after world war 1||Aug 1918 to Mar 1919 (7 Months)||3 years 8 months||
|1920 to 1921 Depression||Jan 1920 to July 1921 (1 year 6 months)||10 months||
|the recession of 1923-24||May 1923 to June 1924 (1 year 2 months)||2 years||
|Recession of 1926 to 1927||Oct 1926 to Nov 1927 (1 year 1 month)||2 years 3 months||
|the great depression||Aug 1929 to March 1933 (3 years 7 months)||1 year 9 months||
|recession of 1937–1938||May 1937 to June 1938 (1 year 1 month)||4 years 2 months||
|The 1945 recession or the post world war 2 recession||Feb 1945 to Oct 1945 (8 months)||6 years 8 months||
|recession of 1949||November 1948 to October 1949 (11 months)||3 years 1-month||
|The recession of 1953||July 1953 to May 1954 (10 months)||3 years 9 months||
|The recession of 1958||Aug 1957 to April 1958 (8 months)||3 years 3 months||
|The recession of 1960 to 1961||April 1960 to Feb 1961 (10 months)||2 years||
|1969 to 1970 recession or the recession of 1969||Dec 1969 to Nov 1970 (11 months)||8 years 10 months||
|the recession of 1973 to 1975||Nov 1973 to Mar 1975 (1 year 4 months)||3 years||
|recession of 1980s||January 1980 to July 1980 (6 months)||4 years 10 months||
|recession 1981-82||July 1981 to November 1982 (1 year 4 months)||1-year||
|1990 recession||July 1990 to Mar 1991 (8 months)||7 years 8 months||
|The early 2000s recession also known as the dot com recession||Mar 2000 November 2001 (8 months)||10 years||
|great recession of 2008||Dec 2007 to June 2009 (1 year 6 months)||6 years 1 month||
|The covid 19 recession or 2020 recession||Feb 2020 to April 2020 (two months)||10 years 9 months||
Is the recession 2022 not too far off?
Today, one of the most searched questions on the internet is, ‘Is a recession coming in 2022 UK?’ and ‘Is the US in a recession 2022?’. Now it is a very difficult question to answer and economists have several opinions about it.
According to some, the red lights are blinking and we should prepare for the next recession. Meanwhile, others say the news is overblown and there is nothing to worry about the next recession.
- The fed’s $3 trillion printing:
In 2020, the Fed printed more than $3 trillion within three and a half months to deal with the COVID impact. In order to get the money into the economy, the Fed purchased bonds from financial institutions, making their balance sheet grow up to $7.17 trillion.
But adding more money to an economy won’t make it better. It will only increase the amount of circulating cash. That is also evident from the fed chairman Jerome Powell’s statement. In his opinion, a full recovery of our economy will not be possible until people are confident again so they can re-engage in economic activity.
- Political conflict:
The Russia Ukraine conflict has increased the current global economic crisis to a decent extent. Experts believe that the economy of Europe and Central Asia will face a 4.1% shrink in the current year. It has also affected the global supply chain which is already in a bad shape due to the recent pandemic.
- Inversion of us 10 year treasury yield curve:
For the first time since 2019, the US 3-month/10-year treasury yield curve inverted on April 1st, 2022. This shows that investors are losing faith in the us economy.
The yield curve for the two-year and ten-year yield has given false signals before, but the yield curve for the three-month and 10 year yield is considered a reliable indicator, and its inversion has caused headaches for many economists.
- Rising interest rate:
In response to the high fred inflation rate (8.5% in March 2022), interest rates are also rising. An increase in interest rates makes it difficult to finance a company or project, which slows down the economy.
In Us, the interest rates on reserve balances increased by 0.9% on May 5, 2022. By analyzing the market data, several experts predict that interest rates may increase in a similar manner very soon. And it warns us about the approaching economic contraction.
- The great resignation:
Approximately 4 million workers left their jobs in the United States in April, and 4.5 million resigned in March. Nearly 24% of millennials say they’d be willing to quit their jobs for higher wages and opportunities within the next year.
In order to retain their current employees as well as to attract new ones, firms should offer significantly higher wages for the same job, which decreases the company’s profit. An economy can get negatively affected by mass resignations since it will appear that the sector is making less profit.
Also, the addition of China’s brutal economic aggression, the US stock market fall (by almost 20% in May 2022), and the recent food inflation (which may hit 9% by the end of 2022) have made things much worse and it makes us think, are we in a recession?
We should be very cautious right now since most of the warning bells turned yellow, but if the problems subside and the FED takes the necessary steps, we can certainly avoid the recession, or else in the worst-case scenario we may see a massive economic downturn by 2022 or 2023. To overcome this economic crisis we have a complete article on the best Investment options during a recession, we encourage you to read it as it will be helpful to you.