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With June’s inflation rate being at its highest in more than forty years , many economists are discussing the possibility of an impending recession. Others are optimistic about higher wages and a booming job market . Either way, “recession” is a word we have been and will be hearing a lot for a while. We may not be able to accurately predict whether or not one will actually occur, but we can at least understand the signs of a recession and how to avoid one.
How is a recession defined?
Well, there isn’t really a universal, clear-cut definition of a recession. For instance, a set benchmark for the unemployment rate that determines whether or not a recession is present does not exist. However, it is often pretty clear when one has taken hold of the economy. Recessions are characterized by a decreasing GDP, drops in consumer activity and wages, greater unemployment, and slowed production . Essentially, all negative properties that an economy can have are indicators of a recession, especially if they continue for an extended time period. Often it is economic experts who judge whether or not a recession is happening . If you were wondering the difference, a depression, like the one that wreaked havoc on the world in the early 20th century, is simply more severe and global than a recession . Recessions are often considered to be part of natural fluctuations in market economies , whereas depressions are much more devastating and abnormal.
Why are people fearing a recession right now?
Rampant inflation is never a good sign of a healthy economy with a bright future. When prices skyrocket and wages don’t follow the same trend, consumption declines, sometimes opening the floodgates for a recession . Although the income of American employees is heading in a positive direction, the rate of inflation is currently outpacing this increase . On top of that, new COVID lockdowns in China  and the war in Ukraine  have only added to the runaway inflation of the last few months. And although the Fed can always try raising interest rates to slow down inflation, there’s no guarantee the issue will dissolve completely. This is because once inflation gets severe enough, demand suddenly rises, since people anticipate even higher prices in the future. This increased demand makes inflation even worse, leading to a snowball effect that is very difficult to control . Also, if interest rates are raised too much, Americans will start to lose jobs, possibly causing a recession .
So what are the chances of a recession in the near future?
Each economic expert likely has their own take on the likelihood of an incoming recession, so there isn’t a general consensus on this subject. For instance, Citigroup sees the probability of a global recession in the next year and a half as being a coin flip, whereas banking company Goldman Sachs places that number at 30% . However, it can be noted that the majority of Americans feel that strong economic decline is approaching, with 70% indicating this in a recent survey .
What can be done?
There are some ways that a recession can be dodged, but it is certainly not an easy task to avoid one. As stated earlier in this article, the Fed can cut off skyrocketing demand by increasing rates. However, this period of inflation has been largely created by a lack of supply due to the Ukraine war and Chinese COVID lockdowns . This issue greatly reduces the margin for error in the Fed’s quest to properly execute future interest hikes. Plus, the success rate of this prevention method is extremely low. A CNBC article claims that interest rate increases only prevented a recession once . For the most part, the rest is up to fate. Stability in Ukraine or a return to the pre-COVID supply chain would be some outcomes that may prevent this recession from becoming a reality.
Whether a recession ends up happening or not, we will hopefully have learned a bit more about the economy coming out of this era of uncertainty. Make sure to always spend and save your money wisely, which will help prepare you for economic turmoil. Smart decision-making will always create more benefits than panicking in these situations.