Jan. 20, 2023

Are we currently in a recession? Is a recession imminent? How bad could a hypothetical recession get?

Such speculation and questions have been at the forefront of investors’ minds — and the headlines —  for months. To help you cut through the noise, we’ve answered your top recession-related questions.

What exactly is a recession? How is a recession defined?

An economic recession is a period in which there is a broad decline in overall economic activity.

Historically, recessions were thought of as being two consecutive quarters of negative economic growth (as measured by real Gross Domestic Product, or GDP). Over time, our ability to measure economic activity has advanced and become much more sophisticated.

Today, the independent National Bureau of Economic Research (NBER) looks at a variety of economic measures to determine if the economy is in expansion or contraction. Key measures include:

• Changes in employment
• Consumer income
• Consumer spending
• Industrial production

Are we currently in a recession?

At the time of this writing, U.S. economic growth appears to be slowing but evidence of a broad downturn is still lacking.

Let’s look at how some of the key economic indicators of a recession are faring:

• Changes in employment: The number of new jobs being created each month remains relatively strong.
• Consumer income and spending: Consumer incomes continue to grow at a strong pace. Consumer spending, meanwhile, has slowed but remains at high levels.
• Industrial production: Manufacturing activity declined in the last two months of 2022, and we believe it could slow further in the months ahead.

Overall, we do not see the economy as currently being in recession, but with further slowing of activity we could yet see one develop in the months ahead.

What are the chances of a recession over the next year?

Currently, we believe the odds of the U.S. economy experiencing a recession in the next year are a little better than 50/50. Federal Reserve interest rates are likely to be at their peak in early 2023. Higher interest rates slow consumer and corporate borrowing and spending. Thus, the greatest negative impact on economic activity is likely to be when interest rates are highest.

What might a recession look like?

If we do see a recession, we believe it would be rather shallow — meaning a modest decline in economic activity — because of low consumer debt burdens, strong corporate balance sheets and a relatively robust job market.

Historically, most recessions occur when consumers are deep in debt. Eventually, consumers exhaust their borrowing capacity, especially if interest rates are rising, and slow their spending. In contrast, consumer debt burdens are currently quite low by historical standards, in our view.  Corporate balance sheets and the job market also appear to be in sound shape. 

If a recession materializes, will the unemployment rate rise significantly?

Given the current strength of the job market, we believe any rise in the unemployment rate would likely be modest. In December, the unemployment rate was 3.5%, matching its lowest level since 1969. In our view, unemployment is likely to rise this year, but remain below 5%.

What’s the relationship between recessions and the stock market?

It may seem counterintuitive, but stock prices often begin their recovery long before economic activity bottoms or corporate earnings reached their lows. During the Financial Crisis of 2008–2009, the S&P 500 Index bottomed in March 2009. By comparison, the recession did not end until 3 months later (according to the NBER) and corporate earnings, on a trailing 12-month basis, did not bottom until January 2010. 

Likewise, during the recession of 1990-1991, the S&P 500 began its rebound in October 1990, long before the recession ended in April 1991 and corporate earnings bottomed (on a trailing 12-month basis) in December 1992. Financial markets typically look forward by 6 to 18 months, so by the time a recession arrives, markets are often already looking forward to the recovery.

What would a recession mean for the housing market?

Housing is likely the sector of the economy that’s most sensitive to interest rates. Given the interest rate hikes already employed by the Fed, mortgage borrowing costs more than doubled last year. The national average cost of a 30-year fixed rate mortgage started 2022 at 3.1% and ended the year at 6.4%, according to the Mortgage Bankers’ Association. New and existing home sales have declined sharply as a result.

Home prices, however, have held up much better than the decline in sales would suggest. Though off their late-spring highs, existing home prices were still 2.3% higher on a year-over-year basis in December, according to the National Association of Realtors. We believe home prices could turn moderately negative on a year-over-year basis in 2023, but a crash in prices is very unlikely given the housing market’s very limited supply.  

We’re here to help you prepare for the unexpected

Whether a recession, market volatility or another unexpected financial event, your Ameriprise financial advisor can help you prepare. They can show you how your portfolio was built to weather different economic cycles and share steps you can take to prepare for uncertainty.