Explaining a Recession
In the corresponding episode of our Money Tips No One Told You Podcast, we spoke with Anthony Greco, Professor of Economics at the Department of Economics and Finance at the University of Louisiana at Lafayette. He graciously agreed to speak with us about recession and inflation. Below is the rest of our conversation focusing on recession.
Q: Everything I hear, everything that's going on in the news, and when we talk about things at the credit union, we're seeing the rates go up, interest rates. And one of the things they'll say is, "They're doing this to try to slow inflation, but it's probably leading to a recession," or some people would say, "We're already in a recession."
A: We are in a recession. It is, really, and has been for decades defined as two consecutive quarters or more of the output of GDP going down, declines in that. And the National Bureau of Economic Research for decades has defined it that way.
Q: Say again what a recession really is.
A: Well, a recession deals with the level of output in our economy, which is measured by an accounting system, and the major account there is called gross domestic product. You hear the term GDP thrown out there a lot of times in news reports. That's our measure of output. So just equate that.
When you hear GDP, output. And output, of course, affects employment. When output is strong, employment is strong. They go hand in hand. GDP is a measure of output. And then when we have a recession, it's when that output level of GDP is falling, or is negative for at least two quarters or six consecutive months. That's the recession. Our output in our market economy is going to go up and down. We have - I think you may have used that term before - cyclical ups and downs. It depends on the level of output, level of employment, level of confidence in the economy, government activity, and so on and so forth. So sometimes the economy is doing very well.
And if you want to look at what a recession is, it's basically got four components or four parts. Let's start off with a good situation of where we were a couple of years ago. We had high employment. We had high output. We were doing pretty well in the economy, very low unemployment rate. And then when that kind of plays its way out - and it usually will for some reason or another - it'll go down. You will get into the thing we call a recession, and then the recession reaches its trough, the bottom point or worst point - that's the trough - and then it recovers after that.
So those are the four identifiable phases of the recession. If you want to put it simply, essentially upswing and downswing. But the economy being what it is, the capitalistic, pure market economy sort of thing will have these ups and downs, and they'll be imposed upon by outside influences and things that you can't always predict.
In the post-World War II economy, the so-called modern economy, we can identify-- and again, this is the National Bureau of Economic Research. They tell you when a recession starts and when it ends, they're looking at output, they're looking at employment, they're looking at income and sales. And so given all those factors, they say, "Oh, this is where these things start to go down. And then this is where things started to go up." Post World War II recessions, we've had 11 of them, and not including this one because we don't know how long this one's going to go.
The most recent one prior to this one was so-called Great Recession. Maybe some people remember that term, that was December of '07 to June of '09. And what we do, which you can find easily in terms of recessions, you can not only see the dates, but the duration, how long it lasted in terms of months, the percentage decline in output or GDP, and then the peak unemployment rate to see how severe the recession was. For instance, in these 11 that we've had, the average has been 11 months for a recession. The average drop in GDP has been 2%, and the average-- or the peak unemployment rate is-- average unemployment 7.6%.
Now, to give you the worst case, that last one we had, December the 7th through the 9th, lasted 18 months. That's the longest one we've ever had. And output dropped more than the average. it dropped 4.1%, and the peak unemployment rate was 9.7%. As bad as it was, there was one recession, '81-'82, it was 10.8% unemployment. So again, just a frame a reference, we have the ability to through the National Bureau of Economic Research, measure these recessions, date these recessions, and see the effect of them in terms of the unemployment rate, the duration of them, how long it lasts, and the drop in GDP. So that's a whole study of economics in and of itself, business cycles, and other kinds of economic fluctuations.
Q: Looking at those kinds of things is how economists determine, "Okay, it looks like we're going into recession," or they can sort of at least try to predict how long it will last and things like that.
A: Exactly. Look at employment, production, income, sales, and mainly the thing is what's happening to GDP. But again, officially, the definition, is six months or two-quarters of decline in GDP. I guess this is getting back to inflation, but we had an inflation rate of 9.1% in June. So that meant that prices in June were 9.1% higher than what they were in the previous months, right?
Now, in July it was 8.5%. So some people started saying, "Oh, we had no inflation. We had to drop in inflation." Well, that's not true. We still had inflation. Prices in July were still 8.5% higher than what they were in June. So we've got to be careful with those kinds of things and be careful what people say because I don't even think they know the difference sometimes. But inflation we know what inflation is. The flip side of inflation, which nobody ever talks about because we haven't experienced it since World War II, very, very seldom, is deflation where the average level of prices will go down.
And then in the middle, the confusing part, is what we call disinflation. That's what happened from June 9.1% to July 8.5%, we still had inflation, but the rate of inflation went down. That's disinflation, not deflation. Deflation we'd have to go from June 9.1% to a negative change in prices in July, which we did not have.
Q: So the rate of increase just wasn't as high as it had been the month before.
A: Exactly. Sometimes people don't realize that and some people are going to tell you that because they want to confuse you with the numbers they throw up here. You can do all kinds of things with statistics and massage them and make them seem different than what they were. It kind of fits your case sometimes, make them almost do anything you want to do with them.
Q: Right. So when you talk about deflation and things like that, so the prices have gone up on products. What does it take for the products to-- those prices to go back down? Is that even possible?
A: Well, that's usually probably not what will happen. In other words, the prices go up, there tends to be a certain stickiness there. Business firms don't want to lower prices very much because then, people are going to expect them to keep lowering prices. I think there'll be some, probably reasonable, adjustment. Maybe they will go down a little bit, but I don't expect to come down to the levels we had before several months ago. It's just the stickiness of prices. And once they get up there, you don't want to see them come down because you don't want to start this idea that prices will keep falling.
We live in a world of inflation. And the global inflation is not all that bad really, because if the inflation is going up a little bit, it means that the output is going up and the employment is going up. We want all those things to rise in a sensible way. But you don't want to get around what we've been around. We've been around double-digit inflation, and it's just too rapid, and it's going to always outstrip the increase in the money income, and means you're worse off. Your dollar isn't going to buy as much.
Q: So as we go into this recession, I'm not sure I know what that means sort of for everyday people. I mean we're paying a lot more for everything. We're struggling to make ends meet for a lot of folks. What is that going to mean for all of us?
A: Well in a recession, of course, sometimes some people lose their jobs so they get the lesser hours of work and so on. Business firms will cut back. Unfortunately, some people do take a hit. And it's just, hopefully, and I don't want to get too political here, but that does make a difference, is who's in charge and what policies are setting forth. It can have a great impact in terms of fiscal policy and monetary policy as to what will happen in the economy.
It's very difficult, and I realize that when you're trying to use policies, basically you're trying to fine-tune the economy. And that's not easy because you're not just looking at a fixed target, it's a moving target. Things are changing. You might put one policy into effect which seems to be appropriate at the moment, and then it turns out to be the exact opposite what you wanted because situations have changed. And we have all sorts of unpredictable events that can take place in the economy, some economic practice, some noneconomic practice. Even if we know they're coming, we don't know exactly when they're coming, how long they're going to last, how severe they're going to be. We do it after the fact. We measure the effects after the fact that we've been through it. That's what it is. Economics is a social science and therefore it's rather imprecise because it deals with human nature and it also deals with those random events that, again, we really can't predict. For instance, this Covid thing. That was a sort of a random event.
Q: It's probably safe to say that the impacts from the pandemic and all of the shutdowns and things that happen have really had an impact on the current economic cycle that we're in.
A: Exactly. Have a continuing impact. Yes. It's hard to recover from losing that many businesses and that many jobs and that many skills. Of course, in terms of economics, was catastrophic and it continues to be chaotic at best.
Q: Right. So I guess we'll have to continue to kind of work our way out of this. Have they made any predictions for how long they think a recession will last this time around?
A: No, I don't think so. Very hard to make these predictions in economics. And so as long as we keep with the current sort of policies that we have here and the current administrations we have here, I don't expect the things to get better anytime soon. Unfortunately.
Q: May get worse before it gets better, I guess.
A: Right.
Q: Is there a way to sort of prepare for something like this, financially?
A: Well, of course it's tough but if you save-- you should have a prudent policy of saving and of course it's easier for some people than for others. And then just kind of get used to maybe a whole new lifestyle. Try it for a while, see what happens. I mean, we have to kind of do it anyway in the recessionary times, but maybe just if you can downsize a little bit in terms of your entertainment and the amount that you spend. Be a little more careful of what you spend, save more money. I think that you take more sensible vacations. Realize that when times are great, fine, but times are not always great. Recognize that these kind of things will happen periodically and you should be prepared. Get a nest egg out there and as I said, try to be a little more in control of your expenses. Don't impulse buy so much. When you go to the grocery store, have a grocery list and try to stick to it. And plan your vacations very carefully and plan all your expenditures. I wouldn't say do it on the spur of the moment. Sometimes you do, of course. But I think if you plan. Planning is a key word.
And of course, if you can, get together with a financial advisor, they can give you some insight as to where you should put the money, what you should do with it and if you have some sort of fund that will automatically make adjustments for you. I wouldn't advise trying to look at the stock market on a daily basis. It'll drive you crazy. You have to know what you're doing there. I would get some professional advice. There are various consumer groups out there of people that get together and talk about investments and think about what they might do, so if you could perhaps research those online and get into some of those groups, I think that would be helpful. As they say, two heads are better than one. And if you can get together and get some ideas from people, people who have done these things, they are very successful people who have started out with very little and have just figured out the way to go. I would try to tap into that resource.
Q: Right. And I guess when you look at people that are maybe close to retirement age or something like that, I'm sure that they may have more issues with their investments because if they're losing in their investments they need them faster. But I guess some of the other folks that aren't so close to that age, they may just need to sort of ride that out and let it cycle back up.
A: We have the downs right now, but we do go back up. And remember that the long run trend over a period of years in terms of output and in terms of the stock market, that's upward. That goes through a lot of ups and downs, we realize that. But don't get all panicky right now with your stocks and your 401k's. I kind of hold the line on that, because that's going to turn around. Especially if certain things happen in the next election cycle. I think it will be an abrupt shoot, upward movement.
Q: Well, I think this has been really great information. I think everybody is going to-- all of our listeners are going to appreciate this and hopefully it will help them navigate these waters a little better. Thanks so much for being here. I really appreciate it and we all appreciate it.
Again, we want to extend a big thank you to Mr. Greco for lending his expertise to us in our discussions about inflation and recession. We hope you all enjoyed it as much as we did.