Are we in a recession in Connecticut? The short answer is probably not (at the moment), but we can’t be certain.
Technically, only the National Bureau of Economic Research — a nonprofit, nonpartisan research group — can make the call on whether the United States economy is in a recession or not. And typically, it does so only after we’ve been in one for a while.
A panel of eight NBER-selected economists, known as the Business Cycle Dating Committee, looks at a number of different data points and confers over whether the economy is expanding or receding — whether we’re in an “expansion” or a “recession.” The committee also assigns start and end dates for each recession. Retroactively, of course.
The most straightforward data point is the growth rate of gross domestic product, or GDP. GDP is the value of all the goods and services we produce, aka the size of our economy. If the GDP growth rate is negative for two consecutive quarters, it’s likely the economy is in a recession.
But that’s not a hard and fast rule. The committee also looks at the latest trends in jobs and unemployment; personal income and consumption; industrial production, wholesaler sales and other measures. The economists take all those data points — and more — into account in deciding whether the economy is in a recession and, if so, when that recession started.
Answering the same questions at the state level gets a little fuzzier, since recessions are generally considered national events. But there are some resources available. The Federal Reserve Bank of Philadelphia analyzes a handful of indicators to approximate economic conditions by state. You can also find charts of several relevant data points for the state on The Connecticut Mirror’s Economic Indicator Dashboard.
But what is a recession?
According to NBER, a recession is “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” This isn’t uncommon, because economic activity is cyclical. Periods of expansion approach a peak and then fall back — and then begin expanding again.
The U.S. economy has gone through 34 recessions since 1854. During a recession, GDP might decline by 2% up to as much as 5%.
The COVID-19 recession was unusual in its short duration, but the decline in economic activity was so widespread across industries, demographic groups, geographic regions — all aspects of the economy — that the committee determined it amounted to a recession.
The Great Depression was essentially a very, very bad recession. GDP declined 29%, unemployment reached 25%, consumer prices and wholesale prices tanked and a third of the banking system failed.
What happens in a recession?
Day-to-day life can get pretty tough for people, businesses, government bodies and other organizations. When the economy isn’t growing, negative performance in one area can exacerbate problems in other areas. For example, if employers cut jobs, personal incomes decline and people spend less money. That can lead to trouble for consumer goods companies, services providers and myriad other businesses.
When companies see their sales decline, that forces cost-cutting on everything from staff positions to research and development. Some employers might have to shutter departments, close down locations, declare bankruptcy or simply go out of business. With fewer businesses hiring, recently unemployed people face a harder time finding a new job.
Recessions also reduce tax receipts, meaning state and local governments have less money to spend on their operations and staff. And they’re hard on investments: The stock market and real estate property tend to lose value, and many people see their savings and retirement accounts shrink. Philanthropy and charitable organizations usually pull back on donations. And financial institutions, wary of taking on risk, often raise criteria for lending money making it harder for people to take out loans.
International trade also tends to decline during a recession, and consumer prices may come down due to lower demand for goods and services.
When — and how — does a recession end?
According to NBER, recessions run about 17 months on average. But since the 1980s, all six have lasted less than a year. A recession ends when the economy has bottomed out, or reached a “trough.” That exact point in time is decided (that’s right!) by NBER. Retroactively, of course.
Fiscal and monetary policy can help to restore the economy back to an expansion mode.
Congress makes fiscal policy — i.e., spending and tax cuts to stimulate economic activity. Some fiscal policies, like Unemployment Insurance, the Supplemental Nutrition Assistance Program (SNAP) and Medicaid, are already in place to help people who find themselves in economic distress. During a recession, participation in these programs tends to rise, which boosts spending in the economy. New fiscal stimulus, like the American Rescue Plan Act, can take longer to disperse throughout the economy.
The Federal Reserve makes monetary policy decisions also designed to stimulate demand — namely, by lowering the federal funds rate. Lower interest rates mean lower borrowing costs for people and businesses, which can stimulate consumer spending and business investment.
Lately, the Fed has actually been raising interest rates. That’s because the economy was running too hot last year, leading to some of the highest levels of inflation since the early 1980s. Many economists and investors were worried that the higher interest rates would lead to economic contraction, rising unemployment and ultimately, recession.
So far, that hasn’t happened — but we’ll have to wait for NBER to weigh in.