TL;DR
A recession is when the economy gets smaller, and it be can harder to get a job, make money
Think about your own personal circumstance, and any shifts you need to make, rather than macro trends.
What is a Recession?
My partner and I drove across the country last month. I’d never done it before, and sidenote, I’d highly recommend.
I grew up on the west coast, so naturally I wanted to take more time through the west and mountain west.
While it was beautiful, the more interesting part was the middle of the country.
Both because it was beautiful and I’m an economics nerd.
We drove through eastern Colorado, Kansas, Kentucky, Illinois, Indiana, Ohio.
And nowhere did we see signs of a recession.
At one point, driving through my partners hometown outside of Columbus, OH, he turned to me and said “Wow, it doesn’t look like any signs of a recession here.”
And he was right.
The homes looked beautiful - new lawn furniture and paint.
People were out walking in the small downtown streets.
The main thing amiss was high gas prices.
Which leads me to today’s newsletter. What is a recession? How does it work? And why does it matter? (…also are we in one?!)
How Does a Recession Work?
The “official” definition of a recession is two quarters in a row of the US economy getting smaller (meaning, in the US, we’re buying and selling fewer items, services for 6 months in a row).
In the simplest terms, we measure economic growth by number of goods services products we buy multiplied by the price of those goods and services.
Often, you’ll hear the acronym GDP or Gross Domestic Product when talking about the size of the economy.
GDP is one key factor economists look for to signal the health of the economy.
And, other factors matter when considering the overall health of our economy.
Like, how many people have jobs (j unemployment rate)? How far does a dollar go (inflation)? Are are people taking out more loans (consumer credit)?
Economists are getting mixed signals about the economy right now. The size of the economy is getting smaller and people are starting to use more credit, but there are a healthy number of jobs available.
Why Does a Recession Matter?
Economic growth is important for a capitalist society. For two main reasons.
First, a growing economy is usually good for society. More people have jobs. More families can support themselves. There’s more tax revenue to go towards education and healthcare and social services.
Second, capitalist societies run on credit. If I loan you money for business, I believe that your business with grow, and you can pay me back. And, how we measure growth is relatively unsophisticated. We dont take into account the environmental toll of the economy or the social toll.
The question “Are we in a recession” matters a lot less than what right now means for you. The more importance questions to think though is your personal situation. Do you have a job? Are you having to use your credit card more often? Are you able to buy what you need on the same budget? Likely, you may need to make a few adjustments in the coming months.
Fundamentally, our economy is made of individuals, and their choices. We look at large datasets of individual choices to try and understand economic health.
Really, what matters is what decisions you need and can make.
Additional Reading
GDP & Recession , NY Times
GDP Growth, All in Podcast
How the Economic Machine Works, Ray Dalio