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'Yes, we are in a recession right now,' economist says, but it's not official yet — here's why

Twenty/20

The 2010s marked the first decade in U.S. history when the economy didn't sink into a recession. Less than six months into a new decade, though, the country is already in the midst of that kind of a downturn.

Data released in late April showed that gross domestic product (GDP) shrank 4.8% in the first quarter, for its worst contraction since the financial crisis. The second quarter — encompassing April through June — will be even worse: Experts forecast that GDP could tumble as much as 30%.

Most economists define a recession as two consecutive quarters of declines in GDP, though the organization that makes the call on these downturns — the National Bureau of Economic Research (NBER) — hasn't yet made it official.

The experts, though, generally aren't in doubt. "Yes, we are in a recession right now, by anybody's definition," says Luke Tilley, the chief economist at Wilmington Trust and a former advisor at the Federal Reserve Bank of Philadelphia.

To know why this period hasn't yet been called one officially, he adds, involves understanding some quirks related to the definition itself and to the committee that's been making this decision dating back to the 1970s.

Plus, calling the period we're in a recession could have a psychological impact, Tilley points out. If business owners hear the word recession, they may get nervous and react by pulling back on hiring plans or major projects. "There might be a self-fulfilling aspect," he says.

How the NBER decides if a downturn is technically a recession

"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales," according to the NBER. The group of economists has made determinations on the start or end dates of recessions within six and 21 months. "The committee waits long enough so that the existence of a peak or trough is not in doubt, and until it can assign an accurate peak or trough date."

The NBER's recession definition is more "amorphous" than that used by most economists, like Tilley, and that can create some confusion. "You can really talk yourself into fits and circles about whether something is a recession," he says. "But it doesn't really matter if it's a recession or not in name."

Members of NBER's business cycle dating committee didn't respond to, or were unavailable for, requests for an interview about their process.

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Why this downturn qualifies as a recession

A recession occurs when there's a significant decline in activity that's spread across the entire economy, and lasts more than a few months. As both consumers and businesses spend less money, that affects whether companies slow hiring or lay off employees, which in turn further impacts how much money is flowing through the economy. 

By the above definition, this downturn qualifies as a recession, according to Tilley. Other economists and business leaders agree. 

As has been the case with past recessions, the Federal Reserve has stepped up in various ways to help stabilize markets and the U.S. economy. Among the actions the central bank has taken in recent months include: cutting a key interest rate to near zero, helping businesses to get funding, and buying government bonds and other assets.

This action speaks volumes to Tilley: "It's definitely the case that the Fed believes this a recession." 

Whatever Federal Reserve Chair Jay Powell may believe, he has chosen his words carefully. Back in March, Powell told NBC News that "we may well be in a recession." In a speech on May 13, however, he repeatedly referred to what's happening now merely as a "downturn," while comparing it to past recessions.

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How the stock market views this recession

In about one month, the S&P 500 tumbled nearly 34%, more than the 20% necessary to be deemed a bear market. That sell-off was historic both in terms of severity and speed, and that indicated that traders on Wall Street were concerned about a recession.

Since March, the market has been surging and now is up more than 32% from its March low. This rebound seems to be at odds with what's happening off Wall Street, as a record number of Americans have filed for unemployment in recent weeks. 

Accurately estimating the severity and duration of what's happening is complicated by the health-related aspects of this crisis, notes John Petrides, a portfolio manager at Tocqueville Asset Management. Traders are trying to predict the economic recovery even before it happens, he says. 

"The stock market tries to predict what the future is going to be, in terms of future company cash flow, corporate earnings are telling what's happening currently, and economic data that shows us whether we're in a recession all tells of the past," Petrides says. "What people are wrestling with is this conflict between the past, the present, and the future."

What people are wrestling with is this conflict between the past, the present, and the future.
John Petrides
portfolio manager at Tocqueville Asset Management

What a recession means for you

Nearly 36.5 million Americans have filed for unemployment as a result of the coronavirus crisis. For most people, whether or not we're in a recession matters less than whether your job might be affected, Tilley says.

For now, you can expect more turbulence in the stock market, as traders try to "make heads and tails" of what's happening, Petrides says. And don't expect the unemployment rate, which was at a 50-year low of 3.5%, to return to that level for at least the next three to four years, he adds.

"There are so many industries that are going to be disrupted," Petrides says. 

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What's more, the economy's recovery is likely to be "pretty slow and challenging," Tilley says. That's because there's still a lot that's unknown, like whether consumers will be willing to return to businesses when they reopen, what companies do in terms of hiring and spending, and when nonessential employees are comfortable returning to work.

That said, not everything that happens during a recession is negative. Experts generally agree the post-Covid economy will look very different — and more than half of the in-demand jobs have typical salaries above $70,000.

Finally, companies are likely to be more flexible with work-from-home policies that will create more investments in technologies to be more productive in that type of environment, Tilley says. 

"One important thing to know about recessions is that they tend to accelerate changes that were already going on in the economy, or things that would've happened," he says. "They can create their own changes and opportunities."

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