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Key learning points
- A recession occurs when economic indicators such as gross domestic product, consumer demand and employment decline
- Since World War II, the average U.S. recession has lasted about 10 months
- If we go back to the 1850s, the average recession lasts a little longer – about 17 months
- Currently, economists predict a 70% chance that the US will enter a recession within a year
With all the recent talk about inflation, interest rates and job openings, you’ve probably heard rumors about impending fears of a recession. While we’re not in it yet, economists generally expect the US to experience a recession this year.
The likely culprit: A powerful combination of ongoing supply chain issues in the pandemic era and the Fed’s battle with inflation.
But exact predictions about when and how severe vary. For example, Wells Fargo sees the US coming in and out of recession within 12 months.
Goldman Sachs and JPMorgan Chase take a less detailed approach, projecting some economic bruising onto an unspecified timeline.
Meanwhile, Barclays Capital predicts that 2023 will see the worst global economy in 40 years.
In other words, even the experts haven’t reached a unanimous consensus on when a recession will happen — if it does. Nor can they agree whether it will be shallow and mild or deep and gushing.
Which begs another question: how long do recessions last? And, more specifically, how long will this one last? (And how can Q.ai help?)
Let’s take a look.
What makes a recession a recession?
The commonly understood definition of a recession is that an economy must experience declining gross domestic product (GDP) for at least two consecutive quarters. But that’s not the whole story.
In practice, official recession statements are made by NBER, or the National Bureau of Economic Research. NBER defines a recession as “a significant decline in economic activity that is dispersed throughout the economy and persists for more than a few months”.
Indeed, NBER takes into account changes in several key economic indicators, such as:
- Real (inflation-adjusted) personal income
- Payroll and Self-Reported Employment Rates
- Retail sale
- Exit industrial production
- GDP fluctuations
However, not all data is equally weighted. If the economy is hit particularly hard in just one or two components, NBER could declare a recession, even if other segments continue to perform.
For example, while the economy was in a slump for only two months in the spring of 2020, the decline was so severe and far-reaching that NBER nevertheless declared a recession.
What Causes Recessions?
Recessions can have a variety of causes, but most often stem from sudden economic shocks or imbalances. Occasionally, a country’s central bank can trigger a recession—whether intentionally or not—as an overheated economy cools.
Consider the 2020 recession, which resulted from economic shutdowns and massive spending cuts as millions of people lost their jobs. And in 2008, the Great Recession followed a collapse of the inflated housing market.
On a practical level, a recession occurs when an event or series of events slows down economic growth. Slowing growth is accompanied by reduced consumer spending, smaller corporate profit margins and rising unemployment.
Often these factors complement each other: as people lose their jobs, they spend less money, further reducing profits. To limit their losses, companies cut payrolls and the recession continues.
Despite the economic pain they bring, mild recessions are usually accepted as part of the natural business cycle.
When economies grow rapidly, they reach a tipping point and ‘correct’ imbalances by cooling down. (Either of course, or with a little help from a country’s central bank.) Soon, production picks up, the economy grows, and the business cycle continues.
How often do recessions occur?
Since World War II, the US averages about five years between each recession. We have only experienced three since the turn of the century:
- In 2001, the internet bubble burst
- In 2007, the housing bubble burst
- And the Covid-19 recession in 2020
The length of time between these recessions has also increased. While six years elapsed between the dotcom and housing bubble, it took more than a decade for the next recession to hit.
How long do recessions last?
Recessions can last from several weeks to several years, depending on the cause and government response.
Data from the National Bureau of Economic Research shows that the average recession lasted 17 months between 1854 and 2022. But if you shorten the time frame to between WWII and today, the average recession lasted only 10 months.
Please note that this is just one averageno rule.
For example, in the early 1980s, there was a recession that lasted for 16 months. Meanwhile, the post-housing Great Recession continued for 18 months between 2007 and 2009.
At the other end of the spectrum, the 2020 Covid-19 recession, at just two months, is the shortest on record.
In general, recessions are a relatively small part of our economic timeline. Over the past 70 years, the US has spent less than 15% of its time in an official recession. And while times are tough for many, the economy on the other hand is often roaring stronger than ever.
The length of every recession since World War II
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What factors influence the length of a recession?
How long a recession lasts depends on factors such as market conditions, the underlying cause and government response.
For example, the Great Recession was a global affair kicked off by an exaggerated housing bubble. When it finally burst, millions of people were forced to give up their mortgages or were flooded. GDP fell by more than 4%, creating a gap of nearly $1 trillion. Meanwhile, major banks like Lehman Brothers were swamped with subprime lending and eventually closed. While it officially lasted only 18 months, the economic fallout from the Great Recession trickled down for years.
In contrast, the covid-19 recession started when governments effectively shut down entire parts of their economies to prevent the spread of covid. But as the world reopened, many recovered quickly as they were strongly positioned pre-Covid. In some countries – including the US – economic stimulus policies gave the economy the momentum it needed to bounce back.
However, the consequences of Covid-19 are still diminishing. While the labor market has largely recovered, supply chains and rising corporate profits have led to skyrocketing inflation. As a result, the Federal Reserve has been steadily raising interest rates over the past year in an effort to cool demand (and prices).
How long will this recession last?
Unfortunately, there’s just no way to know if a recession will hit or how long it will last. Currently, most economists predict that a mild recession could last anywhere from a few months to more than a year. But until – and if – it happens, we’ll just have to wait and see.
Regardless of the recession, Q.ai has your back
As the likelihood of a recession increases with every rate hike, we here at Q.ai believe we need to be prepared. Many investors are turning to so-called “recession-proof” stocks, industries and products to secure their finances.
But if sifting through all your options and hoping you’ve made the right choices seems like a lot of work (it is), we offer another alternative.
With Q.ai’s AI-assisted investment kits, you can enjoy the power of a hedge fund in your pocket without making a fool of yourself. Simply choose the kits that suit your lifestyle and decide if you want to DIY or hand over the reins to our AI. Then sit back and let our artificial intelligence do the heavy lifting for you.
Seriously – it’s that simple.
And while we can’t promise you’ll “beat the recession,” can guarantee we are by your side to secure your future with smarter investments.
That is the power of AI.
Download Q.ai today for access to AI-powered investment strategies.
Source: news.google.com
