Recession or not?

 

I have not had much in the way of inspiration this week.  There seems to be the same issues within the news.  Also I had a minor eye injury that has kept my reading time to a minimum, so I have not invested much time in my latest book.  Writing this blog has had many benefits.  I have spent the last couple weeks in the realm of behavioral economics.  I have found the field fascinating and eye opening.  So this week I have decided to return to the roots of this blog and look at an issue and see if I can make sense of the information available and see where this leads me.  As my blog introduction states:

Like many I am trying to sift through the day to day information over load and make wise decisions that with keep me and my family safe.

I am sure it is possible to "break" the internet by doing a google search for Taylor Swift and Travis Kelce but that would not lead me anywhere productive.  So I thought of the next best thing.  A google search for "will we have a recession soon".  I figure this is a relatively important nugget of knowledge.  If a recession is immanent this would be the appropriate time to take action to lessen the affects on our personal finances.  I have to admit that I do this with some trepidation.  Soliciting advice on the economy can make ones head hurt.  There is no shortage of opinions and analysis.  I am reminded of the comic strip "Bloom County".  One recurring theme is the character Binkley and his "anxiety closet".  This closet is the source of Binkley's nightmares.  One such nightmare is two expert economists sitting at his bed side discussing the Economy.  Pretty scary stuff.

Before getting to far into this lets define a recession.  There is no real official definition of a recession.  A recession is loosely defined as a reduction in economic activity.  However short periods of decline are not considered a recession.  A generally accepted time frame is 2 consecutive quarters of decline.  According to wikipedia there has been 14 recessions since the great depression in 1929.  This Wikipedia chart also indicates the severity and the time frame of each recession.  Economic declines ranged from 19.2% to 0.3%.  Durations ranged from 2 months to 18 months.  For comparison the great depression which began in 1929 lasted 43 months and resulted in an economic decline of  26.7%.  The chart also gives a brief description of each recession and lists some of the factors that initiated each recession.  Even without external shocks recessions can occur as a natural result of the business cycle.

The business cycle is a series of natural periods of expansion and contraction that any economy goes through.  Basically an economy will expand for a period of time until it peaks and then begins a period of contraction.  Contraction continues until a trough is reached and the whole cycle repeats it self.  Governments use a variety of tools to smooth out the cycle of peaks and troughs and keep the economy on an upward trend.  As one could imagine these periods of expansion and contraction can be self-fulfilling prophecies.  As an economy proceeds through an expansionary period consumers become concerned that a recession may occur in the next year.  These pessimistic consumers curtail spending and as a result manufactures produce fewer products.  As a result of reduced output companies lay people off and or reduce overtime.  This then results in consumers now having less money to spend and the economy contracts even further.  Contraction continues until government intervention or a minimum level of economic activity is reached.  This is where the trough is reached and expansion begins, and the cycle repeats itself.

Are we headed for a recession?  According to my google search:

GDP grew at an annual rate of 2.1% in the second quarter of 2023, and the Atlanta GDPNow model is currently projecting growth at a robust 5.4% pace in the third quarter. By this common measure, there's no recession in sight. Oct 17, 2023

But does current status predict the future?  Usually not.  Referring back to the Wikipedia List two of the last 3 recessions were the result of an "economic bubble" (2000, the dot com bubble and 2007, the subprime mortgage bubble).  A bubble occurs when a sector of the economy becomes over valued.  This is usually due to some type of speculative process..  Housing prices are rising so people with spare cash (or the ability to borrow cash) purchase homes and then sell them for a profit.  These buyers then sell the houses again at a higher price.  This cycle continues until the price is so high that the houses stop selling.  When this happens (the bubble bursting) the current owners cannot sell the properties at a profit.  They either sell at a loss or walk away.  Either way now there is less money being spent.  Less money being spent results in a contraction of the economy and a recession.

It is not necessarily the bubble that causes the recession but the sudden reduction in peoples ability to spend money that really causes it.  This is where a number of people think we are heading.  One of the factors propping up the economy is consumer spending, which remains strong.  However this consumer spending has been helped by several things.  Easy credit, covid money and student loan deferrals have all put money into the hands of consumers.  Unfortunately these factors are all coming to an end.  Student loan payments have now resumed, interest rates are rising and covid payments are coming to an end.  Where is the consumer going to get money to spend?  This scenario is outlined in this Fortune article.  Ironically it also references Taylor Swift (and Beyonce) and the impact their concerts have had on the economy.  Fortune magazine equates their tours as the consumers "last hurrah" before the recession.  Whether people simply will have less money due to student loan payments or higher interest rates or decide to hunker down and save the reduction in spending will probably push us into a recession.

But then again what do I know?