How do economists determine whether the economy is in a recession? In summary, if there are fewer than three consecutive months of negative GDP growth, then the economy is considered to be in a recession.
What is a recession? While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle. Instead, both official assessments of recessions and economists’ assessments of economic activities are made by looking at a wide range of indicators, including the labour markets, consumer and business expenditures, industrial production, and income levels. Based on these data, it is unlikely that the decline in GDP in the first quarter of this year even if followed by another GDP decline in the second quarter indicates a recession.
Signs the world is headed for a recession
All over the world, economies are flashing warning signs that they’re teetering on the edge of an economic crisis.
When we’re talking about recessions, the question isn’t “if” but rather “when.”
According to research company Ned Davis, there’s now a 98 percent chance of a global economic downturn. It hasn’t happened since 2008 and 2020.
It’s important to put recession fears into perspective.
The difference is important for investors. Historically, damage to company earnings has tended to be less severe during periods of economic downturns than during periods of economic expansion. For example, during the inflation-driven recessions of both 1982-1983, when the Fed raised its policy rate to 20%, and 1973-1974, when the rate reached 11%, S&P 500 profits fell 14% and 15%, respectively. Compared with the Great Financial Crisis and the tech crash, this has been a relatively mild decline.
Fundamentals Are Stronger Beyond historical trends, several economic factors point to a less severe recession, should one come to pass.
CEOs are battening down the hatches even though most are expecting a mild recession In short, they’re preparing for what could be a long and painful downturn.
The latest sign of that is the fact that CEOs have been trimming their budgets in anticipation of a slowdown — or worse.
In an annual survey by Deloitte, executives said they expect to cut spending on new equipment and software by about 5% this year. That’s up from 3% last year.
Meta’s Mark Zuckerberg has reportedly told his staff to expect layoffs in the near future. And FedEx, which is seen as an economic bellwether, is closing stores and cutting back on deliveries as its CEO warns of a global recession.
“I don’t see a Great Recession,” says David Rubenstein, the co-founder of The Carlyle Group, and the author of “How to Invest: Masters on the Craft,” referring to the downturn that stretched from December 2007 to June 2009.
“I see, if we have a recession, a modest recession — a two-quarter type of recession, not a one-year type of recession.” In conclusion, he said: “We’re going to be OK. We’re going to get through this thing.”
Surviving an economic downturn
Business owners are often caught off guard when the economy takes a turn for the worse. They don’t know what to do next, and it can feel like there’s no way out. But there are steps businesses can take to prepare themselves for tough times.
The first step is to review your financial situation regularly. This lets you see where your money goes, how much cash you’re bringing in, and whether your expenses are reasonable. You’ll also be able to spot any potential problems early on. If you find something amiss, you can make adjustments before it becomes too late.
Next, consider reviewing your balance sheet. A balance sheet lists your assets, liabilities, equity, and net worth. Assets include everything you own, such as buildings, equipment, inventory, and even bank accounts. Liabilities are debts owed to others, including loans and mortgages. Equity refers to the value of your ownership stake in your business. Net worth is simply total assets minus total liabilities.
Finally, look at your income statement. An income statement provides information about revenue, costs, and profit margins. Revenue includes sales and fees, while costs cover everything else, such as salaries, rent, utilities, advertising, and supplies. Profit margin is the difference between revenues and costs.
Once you’ve reviewed your numbers, you can decide whether you want to keep doing business as usual. Or you could try one of the following options:
• Cut down on spending. For example, you might reduce your marketing budget, cut back on employee benefits, or lower your prices.
• Increase efficiency. For instance, you could hire freelancers to handle some tasks, use software to automate processes, or work smarter rather than harder.