By Howard Schneider
WASHINGTON (Reuters) -U.S. Commerce Secretary Howard Lutnick says a recession would be “worth it” to get President Donald Trump’s economic policies in place, while Treasury Secretary Scott Bessent has spoken of a coming period of “detox” and Trump himself says the economy is in “transition.”
However it plays out, history shows recessions – should it come to that – are costly affairs: The pain is never spread equally, and the outcome – from the length and depth of the downturn to the speed and breadth of recovery – is unpredictable.
SHRINKING GDP
In general terms a recession is when the total output of an economy, called gross domestic product, declines in a meaningful way. One common rule of thumb is that when GDP contracts for two consecutive quarters, the country is in recession.
But that doesn’t really capture it. The National Bureau of Economic Research’s Business Cycle Dating Committee, which determines when recessions begin and end, looks beyond GDP at things like unemployment, personal income excluding government benefits, consumer spending and industrial production.
Those might deteriorate just a bit for a long time. Or they might crash so hard that it is obviously recessionary, such as during the COVID-19 pandemic when activity fell fast but rebounded quickly to yield only a two-month recession, the shortest on record in the U.S.
By contrast, a sluggish economy in 2016 never tilted into a declared recession.
NBER never declares recessions in real time. That’s left for others to ponder by looking at things like changes in the unemployment rate, where rises of a half percentage point or more within a year have in the past meant recession is underway.
Nothing in hard data like unemployment, GDP or consumer spending currently suggests that is happening. The conversation is in the air because of recent surveys showing declining business and consumer sentiment, and because of memories of Trump’s first term, when tariffs far smaller than those proposed now, and preceded by tax cuts, caused global economic growth to stall.
WHAT CAUSES RECESSIONS?
As of January, the risk of a U.S. recession was considered small. A low unemployment rate and rising wages meant consumers were continuing to spend, inflation was drifting down towards the Federal Reserve’s 2% target, and the U.S. central bank had cut interest rates by a full percentage point since September. Fed officials considered it a stable foundation for continued growth, and many economists thought the central bank had nailed a “soft landing” from the high inflation of 2021 and 2022.
That’s a rare feat: Sometimes it is central bank policy that triggers a downturn, most famously in the early 1980s when then-Fed chief Paul Volcker sent the economy into a painful recession with crushing interest rate hikes to tame high inflation.
This time, the volatility in sentiment, the declines in stock market wealth, and the worries of a coming drop in activity stemmed from Trump’s move to rewire global trade with broad and steep tariffs on major U.S. trading partners.
Such shocks are the other sources of downturns. The pandemic was another one, as was the combined shock in the early 2000s from the crash in tech stocks and the September 11, 2001, attacks on the U.S.
WHO PAYS THE BILL?
Recessions come with costs. Business profits fall, as do stock prices, which can then amplify the impact as investors reduce their own consumption. Incomes fall and government deficits rise as more people qualify for benefits meant to offset economic weakness, known as automatic stabilizers.
One reason the pandemic shutdown gave way to a period of strong economic growth was the amount of government support under both the first Trump administration and former President Joe Biden. Both administrations left huge deficits in their wake, which some feel may limit the government’s response this time if the economy does sink.
But typically the most notable recession feature is rising unemployment, a fact that puts the heaviest burden of any downturn on those thrown out of work.
Rising U.S. unemployment tends to fall disproportionately on Blacks and Hispanics, but each downturn is different.
The 2007-2009 recession, for example, was both deep and long, emanating from a financial crisis that is among the most difficult types of downturns to resolve. Some have called it the “man-cession” because of large job losses in construction, manufacturing and finance – industries dominated by men. The pandemic downturn, by contrast, initially fell hard on women and Hispanics, with massive layoffs in the services sector.
UPSIDE TO THE DOWNTURN
If there is a bright side, it’s that recessions lower inflation.
There has been talk lately of stagflation, with growing concerns that economic growth will slow or even shrink while inflation rises on the back of the U.S. tariffs aimed at Canada, Mexico, China and other trading partners.
But if a downturn is steep enough, inflation eventually slows as demand weakens, and prices can even drop, something Trump pledged would happen on his watch. In fact, it is unusual outside of recession for overall price levels to decline.
The Fed also would likely cut rates to soften the blow of a recession, causing markets to adjust to new expectations about growth and demand.
Drops in borrowing costs can benefit prospective home buyers in particular, with cheaper mortgage rates – which the Trump administration might also welcome – boosting housing markets and helping with the eventual recovery.
(Reporting by Howard Schneider;Editing by Dan Burns and Paul Simao)
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