[Life Hacker, TND]
After months of discussion, a brief period of optimism, and then the onset of a global pandemic, it’s official: We’re in a recession.
The National Bureau of Economic Research (NBER), which studies the peaks and valleys of the U.S. economy to make this determination, declared it yesterday.
“The usual definition of a recession involves a decline in economic activity that lasts more than a few months,” the NBER committee said in its announcement, noting that it also pays attention to how deeply the economy contracts and the duration of that downturn. The coronavirus pandemic, with its intense global scope, is a major factor that led to the designation of a recession.
This recession declaration was shocking because it came so early. Yes, we know that the unemployment rate is cuckoo bananas and consumer spending is completely thrown off due to the pandemic and its aftermath.
“The unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions,” the announcement stated.
But a recession is typically a period of at least six months of economic decline. And because then NBER waits to see a track record of month-after-month decline, it typically doesn’t make a determination that we’re in a recession until at least six months of bad economic news is behind us. The committee that makes the call doesn’t want to call it too early and send the economy into an even greater tailspin that deepens and negative effects already wearing on the economy.
How long will this recession last? It probably doesn’t surprise you to learn that it’s too early to tell. The recession ends when the economy stops declining, when it reaches its lowest point and starts to rebuild. The NBER says that domestic production and unemployment are the primary indicators of economic activity, and so with both of them down suddenly, we’ll have to wait until there’s obvious recovery.
Here’s a visual to help you picture how the recession determination is evaluated.
This graph is industrial production, which is different from gross domestic production (GDP), but don’t get hung up on that right now. The important thing is that you can see the peaks and troughs that the NBER pays attention to.
You can see that the industrial production index peaked in 2008, then cratered pretty fast. As soon as that line started to come down from the high point, the recession watch began. Once that decline hits its lowest point, the trough, the recession is declared over. (That gray shaded portion is the Great Recession.)
But as you can see here, it can take years for economic recovery to reach the point it was at before that drop.
Then, of course, you meander over to 2020 on the far right of the graph and see the production index just crater down toward that trough point from the last recession.
OK, so that’s the situation. So what can you do about it? How can you protect your money during this time of economic contraction?
Guess what: You’re already doing it.
If you prioritized paying down debt any time in the last year, you’re doing it. If you tightened your budget when the pandemic started to impact jobs in the U.S., you’re doing it. If you lost your job and started making calls to negotiate your bills, you’re doing it. And if you kept your job but decided to hold off on searching for a better one, you’re doing it too.
By Lisa Rowan