Is a recession coming? Recessions and fear of the next, explained.

The US economy is on the brink of the longest period of growth in its history – but no one can really do without the idea of ​​an impending recession.

Economists now believe that another recession could occur as soon as possible, potentially before 2021, and a growing group of badysts and experts have begun to talk more about the possibility of a recession. recession on the horizon. (Others say the situation is not so bad.) Earlier this month, the bond market sent a signal that has generally been a predictor of the economic recession.

But beyond the current forecasts and economic indicators, there is also the simple fact that the Great Recession still weighs heavily. It was a time when the unemployment rate reached 10% and millions of people lost their homes and jobs. Many people who have reached the point of making a financial decision – buying a house, having children, or changing careers – have reached the age of majority at the onset of the disaster.

According to a study conducted in 2018 by the financial services company EY, the millennial generation has more confidence in its economic stability than in the aftermath of the financial crisis, but it is more pessimistic than optimistic: 42% of millennia estimate that the US economy is excellent or good, while 54 percent say it's fair or bad. And millennia are still lagging behind generation X and baby boomers in terms of homeownership and having kids.

"My fiancée and I are very worried about buying a house and then losing value. So we could decide to rent rather than buy, "said Scott Corbitt, a 23-year-old software developer from Utah.

Emily, 29, a Washington resident who asked me not to use her last name, explained that she had started university in 2008, while she was "aware that this moment could have a negative impact on my job search at the end of my studies. " She explained that after graduating, she struggled to find employee in journalism and decided to change careers.

"Many people my age who have graduated from university and are facing the 2008 recession now fear the impact of another recession on the career changes they are currently experiencing – career changes often entailing risks. financial institutions, "she said.

She went on to higher education, thereby taking on more student debt. At age 29, she did an unpaid internship to embark on a new career.

"For most people, the effect of a recession is a fear, not a real loss. It's the fear of losing, "said Betsey Stevenson, former economic adviser to President Barack Obama, currently at the University of Michigan.

But the fact that we have seen a recession for a long time does not mean that the US economy is about to plummet immensely. An old adage of economists is that expansions do not die of old age; something must happen to cause them. There are signs that another is becoming more likely, but fewer signs that we are on the brink of another huge crash.

It is also important to remember that the recession of the late 2000s was bad, unlike most other recessions. It is the combination of an economic slowdown and financial system problems that has made the Great Recession particularly bad.

Many people might start wondering what they should do to protect themselves in case the next recession is imminent, but in reality, it is so difficult to predict that it is difficult to predict there is nothing to do except to keep savings around you in case. Recessions affect the entire economy and we all participate in it.

What's a recession?

A recession is essentially what happens when the economy, instead of growing, contracts.

There are more specific parameters. Some define recessions as two consecutive quarters of negative GDP growth. The National Bureau of Economic Research has a broader definition and defines a recession as "a significant decline in economic activity spread over the economy, lasting longer than a few months, normally visible in real GDP, income real, employment, industrial production and wholesale trade ". retail sales. "

The US economy has undergone dozens of cycles of expansion and recessions in its history. In fact, recessions were happening much more often than they are now, says Richard Sylla, professor emeritus of economics at New York University, and since the late twentieth century, expansions have become longer. The reason is that "we are much less an industrial economy," said Sylla.

Before the Great Recession, which started at the end of 2007, the previous one happened in 2001. It lasted eight months and was relatively mild – so sweet, in fact, that we did not know it would happen as long as it was was not finished. And before that, the last recession in the United States lasted eight months in 1990 and 1991.

Vox / Javier Zarracina

"It's even possible that we are in a recession right now, but we will not know it until six or nine months," Sylla said.

Since about the 1980s, with the exception of the recession of the late 2000s, fluctuations in the business cycle have generally been much less volatile. The highs have not been so high and the lows are not so low. We usually talk about great moderation. This means that the recessions are not as dramatic, but that the growth periods that compensate for them are not as great.

George, a 34-year-old mergers and acquisitions badociate working at a law firm in Dallas, asked me not to use his last name. He thinks that a recession is coming in the next 12 to 18 months and that he has changed his investments and his career path. . "I am convinced that mergers and acquisitions will soon disappear, and I am turning more and more to bankruptcy and restructuring procedures," he said.

Why are we talking more of a recession right now

Recessions do not happen on their own, but instead, "something has to go wrong with the economy," Stevenson explained.

The rumor of a future recession concerns a convergence of factors that, according to many economists, make the recession more likely than less likely, not necessarily in the immediate future, but in the next two years. Earlier in the year, Jerome Powell, chairman of the Federal Reserve, said that he did not think that a recession would occur in 2019, but he worried about the slowdown in the global growth in countries such as China and Europe.

President Donald Trump's trade frictions also pose a risk to the economy and the Fed could potentially become too aggressive in raising interest rates and accidentally harming the economy. The partial closure of the government at the beginning of the year also had a negative impact on the economy, but it is probably not enough to put the United States in a recession.

Natalie Behring / Getty Images

Economists also point out that "yield curve" is a sign of economic slowdown – an insignificant indicator of what will happen. As Robert Samuelson of the Washington Post has recently explained, the yield curve refers to the relationship between short-term and long-term interest rates, usually on treasury bills. Normally, long-term interest rates are higher than short-term rates because it is riskier for investors to lend money over longer periods. When short-term rates exceed long-term rates, the yield curve becomes "inverted", which is often a bad indicator. Each US recession of the past 60 years has been preceded by a reverse yield curve.

Last week, the yield curve was reversed. As Matt Yglesias of Vox explained, this has caused a stir among the financial media and economists. This is not a sign that a recession is imminent, but it's not a good thing either:

But if the empirical connection between past reversal events and recessions is real, it is also clear if you look at the graph that there is a lag in time. This means that there is nothing automatic in this process. And if the theoretical link between recessions and reversals is real, there are also other sets of future financial situations – such as a sudden spike in the value of the dollar – that could produce the same result.

There is the fact that the current economic expansion has been going on for a very long time. If this lasts all summer, it will be the longest in history.

"There is probably reason to believe that it is getting a little long," said Bill Emmons, an economist at the US Federal Reserve in St. Louis.

He recently looked at the housing sector and found that some (but not all) indicators point to a slowdown. "Housing is perhaps the best example of this type of inevitable construction of unsustainable practices," he said.

Tim Lyons, a 37-year-old estate planning lawyer in Los Angeles, told me in an email that the real estate agents he was working with said the real estate market was getting colder. This puts him on the nerves. "My husband and I have considered putting retirement money in the money, but market planning is not really a smart long – term investment strategy," he wrote.

The stock market may also signal an impending recession, but this is not always the case. The market plummeted at the end of 2018, raising fears about an economic downturn – the research interest in the "recession" was higher during the week of December 16 than during the the last five years, according to data from Google News Lab.

Drew Angerer / Getty Images

But if this decline had been a predictor of a recession, it would probably already be there. "The stock market has predicted nine of the last five recessions," joked Sylla.

Marc Goldwein of the Committee for a Responsible Federal Budget, a bipartisan group that advocates financial accountability, said he also felt that some other conditions reinforced the concerns.

The Federal Reserve can generally lower interest rates in the event of an economic slowdown, but as they are relatively low at the moment, the Federal Reserve's room for maneuver is reduced. And the United States already has a lot of debt, which means that there will probably be more political and economic resistance to government spending if a recession comes to happen. "In many ways, the recent tax cuts and spending increases have made it even harder to fight the next recession," said Goldwein.

It's good to be a little nervous about the economy

The US economy seems to be in good shape right now, but at some point a recession is likely to occur.

Plus, even growing chatter about a recession can make it more likely and turn it into a sort of "self-fulfilling prophecy," Stevenson said. If people start to worry about an economic slowdown, consumers start saving their money instead of spending, and companies postpone their investment decisions, which increases the likelihood that things are better

There are also the residual effects of the last recession and the lingering anxieties of those who remember the seriousness of the situation. "In the shadow of the Great Recession, we have to think a little cautiously," Simmons said.

During the recession, most people do not lose their jobs – even in times of deep recession, unemployment peaked at 10%, but that means that 90% of people in the labor market were employed. But bad economic times make people more afraid of changing jobs and taking economic risks.

In a recent study, the Pew Research Center revealed that 54% of Americans think that the US economy will be weaker than today, while 38% think it will be stronger . When broken down by age, 49% of 18-29 year olds, 57% of 30-49 year olds, 52% of 50-64 year olds and 55% of 65+ think that the economy will be weaker by 2050. In other words, older people are actually more pessimistic than young people about long-term economic growth.

A report by Morning Consult, 10 years after the financial crisis, found that 52% of Americans say the Great Recession has an impact on their personal finances and 65% say they are concerned about another impending recession.

"Everyone walks on water for a while," Stevenson said. "If we fall into a recession, the result that would affect most people is that they do not get any increases, they do not change jobs."

Dana Kurzner, a 22-year-old student from Mbadachusetts, told me that she was "terrified" to know that she might be "about to become a market on the verge of knowing another." collapse". She continued, "I have already grown up in a family that suffered from the difficulties of the 2008 recession and I feel so disappointed by the way our economy [and] politics seemed to give the rich most of the benefits of economic recovery. "

The scariest part about recessions may be that you can not do much against them. However, it is good to have savings so that, if you lose your job, you have money you can count on.

"If someone worries about a recession, one has to ask oneself if there is a sufficient emergency fund and the right mix of them." investments? " Zach Teutsch, financial advisor at Values ​​Added Financial, who wrote about the importance of emergency funds for Vox in the past, said. He added that people should manage their money and their investments "on the basis of the idea of ​​a probable recession at a given moment".

But preparing for an economic downturn and saving is often easier said than done. According to the Bankrate Personal Finance website, only 40 percent of Americans have enough savings to cover an unexpected $ 1,000 expense.

If a recession occurs and the stock market collapses, you probably should not be watching your 401 (k) for a while – and unless you really need it, you should not be taking money out of it. no more. In fact, when it comes to investing, the best advice on a down market is often to buy.

Investor Warren Buffett said the following: "Be fearful when others are greedy and greedy when others are scared."

Of course, being able to acquire stock in the stock market in times of economic downturn means that you must have money to spend – which many people do not have.

---

The news goes fast. Find the end of the day: Subscribe to Today, explained, Vox's daily podcast, or sign up for our evening e-newsletter, Vox phrases.