Did We Learn Anything From Past Recessions?
The United States and, on a larger scope, the global economy have constantly been exposed to various international political conflicts (wars and crises) and questionable internal financial speculations. In the last one hundred years, Americans had to face the most profound economic downturns, the most notable being:
the stock market crash of 1929, followed by the Great Depression,,
the post-WWII recession,
the oil crisis in the 1970s,
the economic downturn of the 1980s triggered by the Iranian Revolution,
the housing market collapse in 2007,
and, more recently, the COVID-19 recession.
Still, after analyzing the history of past recessions in the States carefully and looking at our present economic blight, one can conclude that we have learned how to treat the symptoms based on our past mistakes. Yet, we're far from preventing inflation and recession from happening and efficiently reducing its lifespan.
By all means, the big picture is more complex. This piece intends to shed light on the economy's and recession's internal intricacies.
In the meantime, you can be inspired by the closest thing to recession-proof investments that can assure financial peace of mind even during dire straits.
Are we through with, in the middle of, or heading toward a recession in 2023?
For starters, we must understand that recessions are caused by economic cycles. Based on our past experiences, we know that an expansion comes first, then the economy peaks.
Nevertheless, nothing lasts forever: economic heights can't be maintained for too long. A contraction or a course correction occurs as the economy slows down. Oversaturated markets amass ample supplies. The surplus of (overpriced) products will inevitably lead to a downward spiral. However, we're still far from a recession.
Various well-defined economic aspects must be present to discuss the possibility of a recession.
What does a low GDP conceal?
First, National Bureau of Economic Research analysts must demonstrate that the US economy has experienced two consecutive quarters of negative general domestic product (GDP.) According to CNN Business, our economy has grown by 2.6 percent in the last quarter based on inflation-adjusted GDP (data published in March 2023.) However, the growth slightly lags behind expectations.
A sustained period of high inflation rate triggers a recession.
Second, a prolonged high inflation rate can indicate an upcoming recession. High inflation affects Regular Joe and companies the same, as the purchasing power drops significantly. Inflationary tendencies lead to businesses limiting their production and raising product and service prices. Additionally, they often must resort to layoffs in their workforce.
The inflation rate in the US was virtually insignificant before 2020. However, after the pandemic, it grew substantially. In 2021, the average annual inflation was established at 4.7 percent, followed by an eight percent inflation rate in 2022. According to USAinflationcalculator, the first three months in 2023 saw a steady decrease in inflation from 6.4 percent (January) to five percent (March 2023.)
The rise in unemployment will peak during a recession.
Third, a recession is heralded by a robust increase in unemployment. In January 2200, the national unemployment rate was at a super-low 3.5 percent. Then, the unwelcome guest came bringing a sudden boost in unemployment, rising to 14.8 percent in April 2020. Fortunately, the US economy got back on track fast, and by March 2023, the national nonemployment rate was reduced to 3.5 percent.
We have learned, mainly from the Great Depression of 1929, the genuinely abysmal effects of high national unemployment. In 1932, Franklin Delano Roosevelt established new federal agencies devised to create jobs by investing in national infrastructure development. This particular solution should always serve blueprint to address a deeply-rooted economic depression.
About the double-edged sword called low-interest rates.
Fourth, the interest rates (the price of borrowing money) established by the Federal Reserve have an essential saying triggering a recession. Low-interest rates motivate buyers and investors to put money into high-yield assets, such as best starter investment properties. Simultaneously, low-interest rates can lead to high inflation and a drop in the nation's currency. Moreover, the phenomenon encouraged above-the-average risk-taking in real estate investments.
Many criticized the central bank for keeping the interest rates down. After more than forty years of falling interest rates, the Fed has doubled interest since the 2020 recession. However, they can't raise them way too much. Otherwise, it would impede economic growth and accelerate the impending recession. The Fed's 2023 plan is to maintain rates between the four and five percent spectrum.
The US government comes to the rescue.
All in all, all signs point us in the direction that the US economy is slowly recovering. We understand that swift government intervention is crucial in times of crisis. In the first round, it must increase the interest rate.
Secondly, money infusion in the economy is paramount. Think of the American Recovery and Reinvestment Act (2009), federal stimulus bills, and a whopping six trillion USD in pandemic relief to improve consumer spending. These measures proved genuine life saviors.
We're not past fears of a future recession!
How come that critical voices foreshadowing a future recession are growing? The most pessimistic analysts predict that the Fed can't contain the interest rate at an average level which can be catastrophic since it rides piggyback on high inflation rates.
Suppose we add the lingering Covide uncertainties regarding supply shortages and the ongoing Russian-Ukrainian war to these concerns. Rising oil, natural gas, and energy prices are mere "ice cream toppings."
We must remember the acute shortage of materials that affects the building of new construction. For this reason, property prices in the US real estate market have grown exponentially. Under such circumstances, housing market trends for 2023 don't predict optimistic prospects for home buyers and investors, either.
Thus, we quickly realize the chances of a perfect storm shaping the horizon.
Conclusion
Undeniably, past recessions have taught us to look at economic cycles reasonably. For this reason, we comprehend that economic growth will always result in contraction sooner or later. The US economy has known its fair share of ups and downs since its birth. And, often, the downs culminate in a recession.
To a certain degree, we learned to spot the symptoms, such as high inflation rates and low GDP in consecutive years. A sustained period of high national unemployment will also trigger an economic depression. Low-interest rates and irresponsible financial speculations can cause artificially blown-up investments, triggering volatile bubbles to burst. Let's hope we have drawn accurate conclusions from the 1929 stock market crash and the 2007 Great Recession (or the subprime mortgage crisis)!
The road ahead of us is long. While we definitely accumulated knowledge from past instances, primarily from national cases, we can't predict what challenges the future holds. Escalating international conflicts and unbridled technological development will undoubtedly pose severe economic problems for which we will most likely be unprepared.