All the financial news over the past several months has featured opinions on whether or not we're in a recession or if we're on our way there, and some of you have developed your own opinions [1] about the state of the economy. Context tells us that a possible recession definitely doesn't suggest racking up higher credit card bills and blowing your savings on things you don't need, but what exactly is a recession? To find out if your recession assumptions fit the bill just
Most economists agree that it's difficult to tell if a recession is happening until after the fact, but there are specific indicators used to measure the state of the economy. So if there are elements that can be measured, how come nobody is clear about whether or not we're in a recession? The National Bureau of Economic Research (NBER) relies on lagging indicators that take six months to establish, and recessions generally last six to eighteen months [2].
The Motley Fool [3] contemplated this issue and came up with these four indicators to keep an eye on when determining if we're in a recession.
- Slower consumer spending: When the housing bubble popped, the value of many consumers' homes deflated as well. Feeling less wealthy makes people spend less.
- Inverted yield curve: This indicates that investors believe rates will drop in the future, demonstrating investors' confidence that the Fed will continue to lower rates to stimulate a deteriorating economy.
- Rising unemployment: The more people lose jobs the less people are spending money, and higher unemployment shows that businesses are suffering.
- Inflationary pressure: When prices increase for goods like food, gas, and clothing at a faster pace than wages, it becomes more difficult for consumers to maintain their spending habits, causing business growth to slow.
Source [4]