With the constant talk of rising interest rates, inflation, and a general fear of the future financial climate, you're most likely thinking about one thing: the possibility of a recession. But there needs to be more clarity over what marks the beginning and end of a recession and what brings the economy to a tipping point.
If you're curious about the typical duration of a recession and how to prepare yourself, you're not alone. The New York Fed recession probability indicator suggests that as of July 2023, there is a 68.2% chance of a U.S. recession in the next year. But, without proper guidance, a looming downturn in the market can be a frightening reality. And for a good reason—it has the potential to interfere with people's financial situations all over the world.
But don't worry. You don't have to be in the dark about recessions. By looking at the past, we can determine the future of the financial market and what a recession could mean for the average consumer.
History of recessions: What you can learn from the past
First things first, let's establish the difference between a depression and a recession, as both have historically impacted the economy in immense ways.
- Recession: A recession is a decrease in gross domestic product (GDP) that lasts at least two quarters, and economic activity slows down.
- Depression: Rather than a slight downturn in the market, depression is a severe drop in GDP that lasts for a year or more. It's characterized by significant job losses, widespread bankruptcies, and less expensive prices for goods and services.
While no economic situation has ever met the seriousness of the Great Depression, several official "depressions" have defined the public's response to financial downturns. The Great Depression was the most prolonged and significant economic recession in modern history. It lasted from 1929 to about 1939, when multiple economic contractions occurred, including stock market crashes and bank panics.
A positive aspect of past recessions is that they have grown less frequent due to people's understanding of their causes and how to avoid them. Here are some notable examples of recessions we have learned from:
The V-Day Recession: February 1945 to October 1945
This recession occurred after the end of World War II as the U.S. had to cut government spending. The average unemployment rate was 3.8% due to thousands of people losing their jobs after the spike in war-related employment opportunities vanished.
The Investment Bust Recession: August 1957 to April 1958
This economic downturn was caused by the end of the Korean War. Other countries started exporting U.S. goods, which caused The Federal Reserve to tighten monetary policies. As a result, inflation rates rose.
The Dot-Com Recession: March 2001 to November 2001
For eight months the GDP declined by 0.3% to create a mild recession, leading to significant economic expansion. The dot-com bubble collapse caused this recession—a rapid increase in U.S. technology stock equity valuation.
The Great Recession: December 2007 to June 2009
The Great Recession was the worst economic downturn since the Great Depression, resulting in an average unemployment rate of 9.5% and a GDP decline of 4.3%. This situation was caused by a dramatic drop in housing prices, eventually impacting financial markets in most industries.
The COVID-19 Recession: February 2020 to April 2020
The most recent recession lasted two months during the COVID-19 pandemic. Travel and work restrictions caused unemployment rates to climb to 14.7%.
Based on the past, here's what you should know
While these are only a handful of the most prevalent recessions that the U.S. has experienced, experts have considered these situations and adjusted financial practices to prevent similar events. Here's what you need to know about recessions:
- Monetary policy tightening typically proceeds after a recession.
- A recession impacts every person in some way.
- You can typically expect a downturn in the market.
How long do recessions last?
Every recession is impacted by varied factors, resulting in varying durations from start to finish. According to the National Bureau of Economic Research, on average, recessions last about 17 months when looking at data from 1854 to 2022. But, when you shorten the period to only World War II to 2022, the median length is about 10 months.
While this may seem like a long time for the U.S. to be in a recession, it's a tiny part of the economic timeline in the grand scheme. Forbes found that in the last 70 years, the country has only spent about 15% of its time in an official recession.
But what exactly sets a recession in motion? Let's look at the fundamental causes.
What causes a recession?
Even though the start of a recession isn't always apparent, a few elements can combine to push the country into a downward financial spiral.
Economic shocks:
Any out-of-the-ordinary event that unexpectedly affects the economy, including war or pandemic is considered an economic shock. These shocks can cause a surge in demand for specific products or services.
Fiscal policy:
The federal government controls rules and regulations that impact and influence the economy, like taxes. When the executive or legislative branches make changes to fiscal policies, they affect the financial health of the country.
Stock market crashes:
Stock market crashes occur when there's a significant drop in stock prices, often unexpectedly. A market crash was one of the leading causes of the Great Depression.
Monetary policy:
Monetary policies are actions taken by The Federal Reserve to help reach specific financial goals, including targets like lowering interest rates or stabilizing prices.
Asset bubble bursts:
When an asset rapidly grows and then crashes, this refers to the bursting of an asset bubble. Examples include the dot-com bubble burst in 2001 or the housing bubble burst in 2007.
What factors impact the length of a recession?
Experts look at three things to determine if the country is experiencing a recession: economic output, consumer demand, and employment. If these factors are apparent, the National Bureau of Economic Research declares the start of a recession.
Once a recession has begun, the factors that started it continue to impact its length. A recession is considered at its end when the economy grows again, but not by a total return to the market's original pre-recession levels. The recession may be over, but people may not be out of the financial hardship. It takes time for the country to fully recover.
There is always a natural fluctuation in the economy, so slight dips and spikes in the financial market are standard. Experts monitor the business cycle to see if these changes in the market warrant concern.
A business cycle tracks the widespread upward and downward movements of capital. It's split into four distinct phases:
Expansion:
This phase represents expected economic growth characterized by increased employment, consumer spending, and demand. This expansion leads to increased production and the cost of goods and services.
Peak:
The peak phase is the highest cycle point and signifies that the economy has reached its top output levels. It often means the only way forward from here is down, sending the economy into a contraction phase. Investors can cause economic contractions by creating an asset bubble or industrial production, making more than is necessary.
Contraction:
What often starts a recession is the contraction phase. This section of the business cycle marks the slowdown of economic activity, stock market decline, and unemployment. Also, GDP falls under 2%.
Trough:
A trough—or the bottom of the business cycle's economic activity—marks the start of a new wave of expansion and an entirely new business cycle. This new wave also marks the end of a recession and begins a new wave of growth.
So, when looking at the factors that impact the length of a recession, anything that causes this cycle to begin helps a recession end. This part of the cycle includes more economic activity, lower interest rates, and a healthier stock market.
How a global recession impacts the average person
As we've already established, recessions come in many forms, and numerous factors cause them. This results in a diverse set of impacts for the average person. Here's what a coming recession could mean for users in today's economic environment:
Fewer jobs and higher unemployment rates:
During a recession, economic activity is shallow due to soaring prices. This downturn causes the demand for products and services to drop dramatically, resulting in people getting laid off. During harsh market conditions, job opportunities are limited, and employment rates drop. This rate drop happens because there simply aren't enough flourishing companies during a recession to bring on fresh staff. According to Brookings, despite being the shortest in America’s history, 22 million people were put out of work during the COVID-19 recession.
Vulnerable health care coverage:
Most U.S. workers rely on company-provided health care for themselves and their families. When unemployment rates are high, losing medical access becomes more likely. For those who still have a job, employers are still concerned about limiting benefits plans to save money during seasons of financial hardship.
A study by the Economic Policy Institute reported that during the COVID-19 recession, about 12 million Americans lost access to their health insurance. This was due to losing their job or a decrease in company benefits.
Tightened budgets:
When income tightens and prices skyrocket, people tend to hold the purse strings much tighter than usual. Even if the effects of a recession don’t impact you as heavily, it's common for people to pay closer attention to where their money is going. If you're saving for a big purchase like a house or a child's college tuition or attempting to pay off personal loans, having less money and a tighter budget can make these things difficult.
Unprotected investments:
The stock market and recessions are linked, meaning your portfolio of investments may take a hit during a market downturn. A recession can cause a bear market—when the stock market experiences prolonged price declines. This can directly affect the value and return of your assets. Some investments may be more vulnerable to a market change than others, but this doesn't mean all your investments are at risk.
How a global recession affects businesses
Stalled growth:
During periods of economic recession, businesses often grapple with many challenges that can significantly impact their operations and financial stability. Stalled growth and reduced profits become common as consumer spending decreases and market demand shrinks. Demand decline and reduced access to credit can hinder expansion plans and create liquidity issues. Layoffs, driven by the need to cut costs, can increase Employment Practices Liability claims. They can also trigger opportunistic claims across various lines of coverage.
Financial risks:
The heightened rate of bankruptcies further exacerbates the business landscape while placing increased pressure on Directors and Officers (D&O) to navigate complex legal and financial scenarios. The already challenging insurance market witnesses an amplified reduction in property catastrophe capacity, resulting in higher insurance costs across all domains.
Don't fret: Marsh McLennan Agency can lend peace of mind
A possible recession on the horizon is an unsettling idea that can lead to stress and worry. While a lot about a recession is out of your control, you're not alone regarding your financial health and well-being. As companies deal with tightened budgets and unprotected investments, repercussions also extend to retirement plans.
With unmatched placement capabilities across all lines of coverage, we can strategically tailor coverage options for your business.
Marsh McLennan Agency provides crucial pre-bankruptcy steps, emphasizing D&O considerations for adequate runoff insurance. This coverage may offer restructuring solutions, credit insurance, and property loss control. Our comprehensive solutions, such as Workers' Health 360 and Healthy Insights, help address workforce well-being, further aiding businesses in navigating the challenging landscape of recessions.
We also offer business interruption insurance to help ensure your company remains on the right path, no matter where the economy heads.
Talk to one of our team members to get started today.
