First time since 2009: Recession
By Joel Dresang
It’s official: We’re in a recession.
Academic economists who make up the National Bureau of Economic Research wasted no time declaring a downturn for the U.S. economy amid widespread closures in response to the COVID-19 virus.
According to the statement issued by the NBER June 8, the recession began in February with the peak of the previous economic expansion, which lasted 128 months—the longest in history.
Generally, economic recessions are considered to be at least two consecutive quarters of declining activity, broadly measured by gross domestic product. However, the NBER economists weigh an array of variables before making their pronouncements. In its statement, the NBER said primary measures were domestic production and employment—both of which tanked as the country shut down to limit the spread of the coronavirus.
GDP sank at an annual rate of 5% in the first quarter, which included only the first couple of weeks of shelter-in-place orders. Employment plummeted by record amounts, shedding 22.1 million jobs in March and April. The unemployment rate jumped from a 50-year low of 3.5% in February to 14.4% in March, the highest on records going back to 1948.
Frequently Asked Questions
Determination of the February 2020 Peak
Business cycle dates (back to 1854)
Acknowledging that recessions typically last six months or more, the NBER said, in effect, this time may be different.
“The unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions,” the statement read.
In virtual testimony to Congress, Federal Reserve Chair Jerome Powell suggested the economy could already be making a comeback, as long as the virus is “reasonably well under control.” He also encouraged additional fiscal support on top of nearly $3 trillion in emergency spending.
The recession announcement came as relatively quick work for the NBER, which in recent history has taken an average of eight months after the fact to proclaim that a recession has begun. In two of the last three recessions (in 1990 and 2001), the economy was expanding again before the NBER ever said it was in contraction.
Of course, recessions can impact the corporate earnings and interest rates that matter to long-term investors. FactSet expects companies in the S&P 500 to have about 21% lower earnings in 2020 from 4% less revenue. And interventions by the Federal Reserve along with statements by Powell, point to interest rates near zero for some time.
The abrupt severity of the latest economic downturn is a dramatic reminder to investors that recessions are impossible to predict and therefore necessary to prepare for.
“It’s important for people to build balanced portfolios that’ll stand the test of time because, more than likely, you’re just not going to see the next recession coming,” Bob Landaas said in a Money Talk Video in April 2019.
“As an investor, as long as you’re properly allocated, as long as you have that balanced portfolio, you’ve positioned for those types of things,” Kyle Tetting said in a Money Talk Video in February 2019. “You’ve given yourself some places to hide when the market does turn for the worst and when the economy does slow down.”
Investors should be concerned about recessions, Kyle said, but also understand that balance will help them endure.
Joel Dresang is vice president-communications at Landaas & Company.
Keeping balance in unnerving times, by Bob Landaas
Recessions: Uncertainty suggests balance, a Money Talk Video with Kyle Tetting
How to handle fears of recession, a Money Talk Video with Bob Landaas and Kyle Tetting
Gross Domestic Product, from the Bureau of Economic Analysis
U.S. Business Cycle Expansions and Contractions, from the National Bureau of Economic Research
(initially posted July 2, 2020)
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