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The traditional definition of a recession is:
In simpler terms, it’s a 6+ month time span in which our economy shrinks and business activity declines. This past quarter we have already satisfied this definition, so by traditional standard, we are in a recession.
Well, recessions can also be measured by things such as employment levels, cash in the bank of consumers, and other barometers of economic health. Unemployment is at a fairly low 3.7%. Though this is true, the unemployment only calculates the number of people with jobs out of those who want to have one. If you don’t participate in the economy (i.e. not looking for a job, retired, etc), you are not counted. If more people stop participating in the labor force, then the unemployment rate looks artificially low. And lo and behold, our labor force participation rate is historically low at 62%, vs. almost 67% in 2008, our last recession. Why is that?
The fewer people we have in the labor force, the slower our economy will grow. In order to produce, companies need employees. Two major factors for folks leaving the labor force are:
A good amount of folks were severely impacted by COVID-19 and so have left the labor force for health reasons. The bigger reason, however, is that our population is getting older and retiring. The percentage of the population 65+ grew from 13% to 17% over the last 10 years. Some folks are working later into their lives, but not enough to offset retirement trends. Many even retired early due to COVID.
Economists and the government fear saying the word recession, because as soon as you do, people buckle down harder, save more, spend less, and ultimately makes the economic situation even worse. We say this all the time, but much of economics and finance is more behavioral than it is math-based. With elections coming up, politicians don’t want things getting even worse than they are.
Here are the facts:
So what does this mean?
We’re in a weird in-between place, where our economy is surviving due to stimulus and credit. People have jobs, but are not earning enough to meet the rising cost of goods. So they’re putting it on credit.
This means the trigger or catalyst for a recession is a failure of our credit system.
Personal lenders and Buy Now Pay Later companies are faltering, but credit card companies are still keeping it movin’. The day they all start pulling back is the day it will be harder for the average consumer to buy goods and pay their bills. If people buy less, companies will be forced to lay off workers because it won’t be profitable for them to run a large ship. And then we’re really in a recession.
Our credit system is faltering but is still working, not like in 2008 where it pretty much went to a standstill. Our suggestion? Try not to rack up higher balances on you credit card bill and focus on only spending what you have. And please, for the love of all that is good, START AN EMERGENCY FUND. If it becomes harder to get a job, you’ll want cash to back you up.
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