It’s everywhere. On all the channels. In all the papers. Even on social media. What the heck is going on and should everyone be concerned? I’m no prognosticator, but let’s see if we can at least explain why is there all this talk about recession.
Why is there need to define recession?
Well, I’m certainly not trying to turn you all into economists and the definition does get a bit technical. But, if you want to get some feel for why is there all this talk about recession, we have to at least roughly know what it is.
So, by definition, a recession is when an economy slows to the point that GDP declines in two consecutive quarters.
I know, boring. Plus, what the heck is GDP, right? I mean, does every explanation just mean you need to get another explanation? Nah, let’s stop it right here with a simple statement: GDP is everything everybody everywhere produces.
That means goods (toys, cars, lumber) and services (doctors, programmers, accountants). Basically, the total sum of what we Americans provide to the world (here and abroad).
Big deal, what’s six months in the big picture?
Again, a bit technical, but think of the first two quarters of a slowdown as the first few dominoes in one of those cool domino chains you hopefully have seen a video of sometime (if not, look one up – they are way cool).
Things start happening that effect stuff down the line. Companies slow their hiring. They may also slow raises.
That means people have less free money to spend above bills, so they buy less (or can afford less). That slows business even more and then businesses repeat the above. And again.
Plus, when business cut back, that means more suppliers slow down. Guess what they will do? Maybe worse for some small suppliers, they may have to cut jobs.
Why is there all this talk about the stock market, then?
That’s actually a good point. The stock market has historically been a bad indicator of the economy. More so now in the age of large computerized investment programs.
Much of the movement of the stock market is dependent on momentum and guesswork. It’s legalized betting at its worst, because it affects almost everyone in America through numerous savings and investment plans.
But, at the end of the day, the stock market is just people guessing where the economy is going. Some of the people are very smart. Some are just gamblers. And the computers are not AI, they just do what those people tell them to.
Then what does cause a recession?
A lot of things. Most importantly, as in real life, it’s all about seeing the big picture.
The United States has about 330 million people. That includes the very old and the very young. The world has 7 billion people. To grow our economy, we have to be a vital part of the world.
For a while, we can get by just buying more stuff, but even that stuff involves lots of products including parts from outside the US or made entirely outside the US.
Similarly, we sell a lot of our own products outside the US (ask our farmers or tech industries).
For example, our GDP was close to $19 trillion (yes, trillion!) last year. About 12% of that (a little over $2 trillion) was from imports. Another 15% (nearly $3 trillion) was from exports.
So, the rest of the world accounted for $5 trillion dollars of our GDP.
Yeah, okay, but what has changed?
Big picture? We have been fighting with the rest of the world, economically, for a few years now.
Policies have been put into place that some people claim will strengthen our bargaining positions with other countries. This may be true, but the entire world’s economy may not be strong enough to withstand the “negotiation”.
Many of the major economies of the world have already started slowing, in advance of the US. We are a nation of spenders, so we tend to be the last to fall (think of us as the domino at the end of that long chain).
But! Remember that $5 trillion of our economy is based on the rest of the world. Plus, there is a magnifying effect that happens when the rest of the world slows down.
At that point, cheaper goods dry up and prices have to climb, since US workers tend to make more than most countries (we’re actually 4th highest paid, but the three in front of us are hardly economic powerhouses).
Then, inflation spikes and interest rates climb. Loans are more expensive. Business investment is more expensive. Credit cards skyrocket. Tighter and more costly credit leads to less spending and an even slower economy.
But that’s goofy. I don’t see any of that.
Yet. That’s why there is all this talk about recession as opposed to actually being in one.
Although, when was the last time you got a healthy raise? Have your medical expenses been rising faster than your income? Are your benefits at work being decreased or costing you more?
If you’re a renter, you sure know that rents go up at a higher rate than your pay. There is all this talk about new jobs being created, but are they better paying jobs?
There is a lot of false optimism out there based on the stock market going up. Outside of that, do you have any savings? Do those IRA or profit sharing plans pay your current bills?
Why is there all this talk about recession
So, if we are to boil it down, it comes to this: the economies in the rest of the world are slowing. That, in effect, will slow down the economy here in America.
A recession is just the effect of that slowdown in two consecutive quarters. It’s an economic definition. The reality to Americans is that raises will be slower and lower. Job growth will slow and some jobs may be cut.
While the economies across the globe have their own troubles, to be sure, the economic fights the US recently began waging on them (such as tariffs) have greatly accelerated their problems.
We do not and can not pretend that we can make everything in the USA. We need the rest of the world and they need us. Currently, we are making it more difficult for them to succeed. Metaphorically, they are our nose and we are the face.
Their pain is just beginning to be felt by our industries. That is the answer to why is there all this talk about recession.
If that pain moves from the industries to us, it won’t just be talk any more.