U.S. recession

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It is tempting to say that the US is headed for a U.S. recession or is already in one. Stocks recently hit their lowest level since the pandemic outbreak as the economy slipped into recession. Now, to add to the pain, the US economy has contracted for the second quarter.

The reading comes as inflation is at a 40-year high, forcing Americans to cut back on spending to stay afloat. However, unemployment is remarkably low. The 0.9% decline last quarter was driving primarily by sharp declines in business inventories. Government spending, and residential and non-residential investment.

But a contraction doesn’t necessarily mean a recession is on the way.U.S. recession

What does the recession mean?

A recession means a significant decline in economic activity.

There is an unofficial definition that two consecutive quarters of negative GDP means that the economy is in recession. But the National Bureau of Economic Research, which makes the official determination of when a U.S. recession began and ended, says a significant decline in economic activity cannot be determined by GDP alone.

In general, a significant decline in economic activity is the result of several factors, including high unemployment. A slowdown in production and goods sold, and a decline in wages in addition to negative GDP figures, according to the NBER.

What will the U.S. recession mean?

During a recession, many people tend to lose their jobs. Until they can find a new job, they often have to cut back on spending or take on more debt to finance their expenses.

For example, at the height of the COVID-19 recession, nearly 23 million Americans were laid off. This came as businesses were forced to close to limit the spread of the virus. Without customers, employers could not afford to pay all their employees.

What happens to stocks during a recession?

The S&P 500 entered the bear market territory in June, meaning it has fallen 20% from its January high. However, the index is on pace for its best month of 2022. That may quell some concerns that the US is headed for a recession, although bear markets alone do not mean the economy is in recession.

Bear markets “are almost always associated with recessions”. Said Matt Stucky, senior portfolio manager at Northwestern Mutual. The only exception was Black Monday when the S&P 500 fell into bear market territory in one day. But the economy was not in recession.

According to research published by RBC Wealth Management, the S&P 500 loses an average of 32% of its value during a recession.

How long does a recession last?

Since World War II, there have been 12 recessions lasting an average of 10.3 months.

But there is a wide range. The last recession was the shortest ever, lasting just two months, from February to April 2020. The previous recession, also known as the Great Recession, lasted 18 months.

Will there be a U.S. recession in 2022?

A recession is unlikely this year, economists say. But unlikely doesn’t mean it’s definitely out.

For example, Goldman Sachs sees a 30% chance of a downturn over the next year, while Wells Fargo predicts a mild recession in early 2023. Also, many more blogs are there on investments here.

Source: Federal Reserve System (FRS) Definition.

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