A recession, if any, would be different unless the IT sector suffers a severe blow with a cascading effect
By Kiran N. Kumar
No two recessions are alike and the potential of 2022 slipping into it seems rare. If it ever occurs, it would be different from the past ones when a significant fall in spending generally led to a recession or a sustained period of weak economic activity with negative growth, and of course, a huge rise in the unemployment rate.
Some traditional signs of an economic slowdown are already here in the United States — GDP has shrunk for two quarters consecutively and homebuilding activity has plummeted. Post pandemic, lowest consumer confidence is being recorded. But will it lead to a recession?
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Since 1854, the US has, on record, witnessed 32 cycles of expansions and contractions in economic activities on record, with an average of 17 months of contraction and 38 months of expansion.
In recent history, from 1980 onwards, eight periods of negative economic growth over one fiscal quarter or more, and four periods to be categorized as recessions, have been recorded by the National Bureau of Economic Research (NBER).
The first one between July 1981 and November 1982 lasted for 15 months, followed by another between July 1990 and March 1991 for eight months. The next one between March 2001 and November 2001 also lasted for eight months, while the last one was during the period between December 2007 and June 2009 for 18 months.
During the Covid pandemic, NBER had declared a two month Covid-19 recession for February-April 2020 but it was seen as part of a global freeze undergone by almost all the countries.
However, in July 2022, following a second consecutive quarter of shrinking GDP, NBER said, “There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions.”
In all these recession periods, the 2008 phase remained on top with all phases of the shrinking economic activities in the country, especially the bust of the subprime mortgage, followed by fall in private consumption and entering the severe unemployment front.
First, 63,000 jobs were cut in February 2008, and on Oct 1, the Bureau of Economic Analysis reported an additional loss of 156,000 jobs in September.
In November 2008, the job cuts reached 533,000, the largest single-month loss in 34 years. Overall, in the year 2008, an estimated 2.6 million jobs were lost and by March 2009, the figure reached 5.1 million jobs, the largest annual jump in the number of unemployed persons since the 1940s.
Impacted by a protracted credit crisis and rampant inflation in commodities such as oil, food, and steel, the US experienced the worst phase of recession and the third quarter of 2008 witnessed a GDP retraction of 0.5%, the biggest decline since 2001. And, the 6.4% decline in spending in 2008 Q3 on non-durable goods like clothing and food was the largest since 1950.
The NBER later confirmed that the 2008/2009 recession ended in June 2009, making it the longest recession since World War II, turning it into a benchmark for a formal theoretical or empirical model to accurately predict the course of a recession.
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Experts differ on 2022 recession
Unlike any of the above factors that worsened the 2008 recession, experts argue that the United States market is now robust with cash and higher employment figures. No spending squeeze is seen, rather the Fed has announced higher rates of interest.
Shrinking economic output, higher unemployment and lower consumer spending form the cycle of recession but in 2022, unemployment is still at a record low of 3.6% in June – the lowest since February 2020.
Unlike the cash crunch in 2008, US firms are reporting consequent profits and sitting on an immense cash hoard with an average after-tax profit margin of about 16% now, a double digit. The overall cash reserve with corporations is estimated to be a record level of about $4 trillion.
Finally, during the recession, the central banks usually cut interest rates and add more money to the economy but in 2022, the Fed has been aggressively raising interest rates to curb inflation.
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The NBER’s business-cycle dating committee has already rejected the notion that two negative quarters of GDP is the definition of a recession and preferred to look at indicators ranging from consumption to jobs to industrial activity.
The NBER committee views recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Robert Gordon, a Northwestern University professor and member of the committee, has declared that “there is currently a conflict between the robust growth of payroll employment and the modest declines in some other monthly indicators.”
To call it a recession, NBER prefers to wait for more than one or two indicators showing weakness and the decline being significant and lasting more than a few months.
Hence, a recession, if any, is going to be different in 2022 unless the IT sector suffers a severe blow, with a cascading effect on other contributory factors to lead to a recession.