Written by Management Consulted
Are we headed for a recession? In addition to everyone’s concern for the health of their loved ones, the coronavirus has people everywhere wanting to know if a recession is coming in 2020 and beyond. However, if you’re the kind of person who pays attention to financial news, you were probably wondering about the possibility of a recession long-before the COVID-19 pandemic.
Since the tail end of the Great Recession, markets have seen an unprecedented amount of expansion. The US experienced a record-breaking 121 straight months of growth—that’s a decade-long bull market. But no bull market lasts forever. Starting in the second half of last year, more and more investors began to anticipate a recession expected to slow the economy in 2020 or 2021. The global slowdown in response to the coronavirus pandemic, has made those expectations all but guaranteed. Let’s take a look at what exactly a recession is and how we know when one is coming. After that we’ll look into what kinds of effects a recession will have on the economy, and on consultants & consulting firms in particular.
What is an Economic Recession?
The meaning of a economic recession is one of those things we might think most people agree about. But if you asked ten different economists, you’d probably get ten slightly different answers. The National Bureau of Economic Research—a private, nonprofit, non-partisan organization—offers a good general definition: “A significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.” But that still invites the question: how do we know for sure when a national or even global recession is happening or is going to happen?
This refers to what economists call recession indicators. Not everyone agrees on what signs and metrics are the most reliable recession indicators. But there are a few indicators most economists and investors pay some attention to. Some of the safest indicators include real GDP and real income (the ‘real’ here means the effects of inflation are taken out of the figures involved). When GDP and individual incomes fall consistently over a period of at least several months, it could mean a recession is coming or has arrived.
Other recession indicators include the productivity of the manufacturing sector, manufacturing and wholesale retailers’ sales figures, and the yield curve. The ‘yield curve’ refers to the interest rates for 2- and 10-year treasury bonds. Historically, the ‘inversion’ of the yield curve to negative interest rates has been an indicator of a recession. The yield curve inverted for the first time since the Great Recession on August 14, 2019. This is what first got so many investors to start predicting an economic recession.
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