Key Takeaways

  • A growth recession involves a period of slow economic growth along with rising unemployment rates, but without a full contraction in the economy.
  • The Fed Chair Jerome Powell has abandoned his plans of a soft landing as the battle against inflation wages on. A soft landing would cool the economy enough to decrease prices without causing any kind of recession.
  • If the labor market feels the brunt of the rate hikes, this could lead to increased unemployment numbers, and further economic slowdown.

When the Fed raised interest rates by 0.75% at the September meeting, many analysts were concerned that the move would bring the economy into a recession. A soft landing was no longer the likely outcome, since it has become obvious that inflation won’t be easy to tame with monetary tightening.

Federal Reserve Chair Jerome Powell even went as far as to say that it looks like there’s no painless way to fight inflation. Without using the term “growth recession,” Powell hinted that this may be the result when he spoke In Jackson Hole, Wyoming on August 26—almost a month before the recent rate hikes.

Let’s look at how a growth recession impacts all of us.

What is a Growth Recession?

A growth recession is when the economy experiences an extended period (often more than just one quarter) of below-trend real GDP growth and rising unemployment. The meager growth is more of a slowdown as the economy isn’t expanding as quickly, but there’s no actual contraction, hence the “growth” moniker. An official recession occurs when the country experiences two consecutive quarters of negative real GDP growth, while a growth recession doesn’t have negative real GDP, at least that’s the classic definition.

The term “growth recession” came from NYU economist Solomon Fabricant when he first coined this phrase in research published in 1972. Fabricant believed we needed a new definition to determine the difference between a full-blown recession and an economic slowdown that is milder but still substantial. The term “growth recession” became the solution.

A growth recession is much different from the dreaded stagflation that the U.S. experienced for the first time in the 1970s. Stagflation is worse than a recession because times of stagflation involve high inflation rates along with high unemployment rates and slow economic growth. A growth recession would ideally have lower inflation since it would have been defeated by raising interest rates.

Growth Recession vs. Soft Landing

A soft landing is when the Fed raises rates enough to slow down demand without pushing the economy into a full-blown recession. For a soft landing to happen, unemployment numbers can’t increase too much and the GDP doesn’t turn negative. The goal of Fed leadership was to restore the price stability and bring the growth to a moderate level while the unemployment numbers went up modestly or remained the same. During a soft landing scenario, companies would reduce job openings instead of laying off workers.

When the Fed started raising interest rates in March of 2022, the goal was to create a soft landing so the economy could avoid a recession. When Powell spoke in Wyoming, he clarified that reducing inflation would require softening labor market conditions. Many interpreted this as meaning that he expected higher unemployment since companies would be forced to lay off employees to keep up with a decrease in consumer spending due to the economy cooling off.

The harsh reality is that a soft landing requires a decent amount of luck matched with solid policy-making at the right time. There are no guarantees how a labor market will react to increased interest rates since the cost of borrowing money goes up and businesses may start cutting back on staff as consumer demand decreases.

The biggest danger to a soft landing occurs when the unemployment numbers go up due to rate hikes, and people are suddenly out of work. When there’s no money coming in, households will not be spending money beyond the absolute necessities, which results in less overall economic activity. This would impact discretionary spending, and there’s no telling how far this could go. However, in a growth recession, the economy slows down but doesn’t grind to a halt while unemployment goes up.

It’s also worth mentioning that historically speaking, the Fed hasn’t been able to accurately create a soft landing for the economy very many times. Fed Chair Jerome Powell argued that soft landings happened after monetary tightening in 1965, 1984, and 1994.

Growth Recession vs. Recession

The most important comparison to make here is a growth recession to a regular recession. The main distinguishing feature of a growth recession is that it’s a slowdown in the GDP instead of declining GDP. The unemployment numbers rise in both scenarios, but a growth recession is not a complete contraction. Based on this definition, things are starting to look like a real recession, not just a growth recession.

The US economy has seen 11 recessions since 1948, with the shortest one occurring in 2022 during the start of the pandemic. Recessions are to be expected as a natural part of the economic cycle; we go through periods of expansion followed by periods of contraction. There could be a trigger for a recession or an unforeseen shock to the entire economy.

If we experience a growth recession instead of a true recession, the hope is that the economy will just cool down for a bit. How this scenario plays out with the fastest rate hikes since the 1980s is something we’ll have to watch unfold.

How Does a Growth Recession Affect Me?

We’ve looked at how a recession affects everyone, and the reality is that a growth recession still impacts most people. The brunt of a growth recession is felt in the labor market as jobs are lost due to decreased consumer spending. The consequences to your personal finances are based on what field you work in.

Sponsored

An economic slowdown means less money is in the economy, so this could impact everything from real estate to discretionary spending. The worst-case scenario would be widespread job cuts, and you end up losing your job. If things aren’t so dire and companies don’t have to lay off staff due to decreased consumer spending, they may just cut back on raises and promotions.

The increased interest rates that bring us into a growth recession would also impact our finances since the cost of borrowing money would be more expensive. This means that credit card debt would have a higher interest rate and mortgage payments could be much higher.

We also can’t forget how volatile the stock market is during a growth recession with so much uncertainty. Companies would report lower earnings due to decreased consumer spending, which will drive down stock prices.

What’s next for the economy?

We have yet to announce an official recession. A recession is typically defined as two consecutive quarters of decreasing GDP, which has already happened in 2022. However, the economists responsible for declaring a recession also look at consumer demand, economic output, and unemployment numbers before making a decision.

The White House has referred to the economists from The National Bureau of Economic Research (NBER) as the official scorekeepers of a recession. There are two Fair Open Market Committee (FOMC) meetings left for 2022: November 1-2 and December 13-14. Analysts and investors will be paying attention to see what announcements are made. It’s important to note that there will be data about the consumer price index (CPI) and the labor market before these meetings for the central bank officials to review.

The positive news throughout the year has been that employment has remained strong. While some analysts are supporters of using the wage data over the jobs numbers because they don’t want wages to fall too far below the inflation numbers.

The soft landing scenario looks highly unlikely because the Fed can only raise interest rates to combat rising inflation. Unfortunately, there are many other factors involved when it comes to inflation. The ongoing Russian invasion of Ukraine is causing supply chain issues that are making the prices of various goods and energy go up. There’s also a unique demand lingering in the economy from when pandemic restrictions were lifted.

How Should You Invest Your Money?

The harsh truth is that it’s difficult to tell exactly how the stock market will react to a growth recession. Stocks all react differently to a recession or economic slowdowns. There are some industries (health care, energy, and consumer goods, to name a few) that tend to be recession-proof.

We also realize that even during the best times, investing in the stock market is risky, there are so many factors at play. For a simpler approach, you can review Q.ai’s Inflation Kit.

Q.ai takes the guesswork out of investing. Our artificial intelligence scours the markets for the best investments for all manner of risk tolerances and economic situations.

Better still, you can activate Portfolio Protection at any time to protect your gains and reduce your losses, no matter what industry you invest in.

Bottom Line

You must prepare yourself financially for the worst-case scenario. Far short of fearmongering, we would simply remind investors that it’s better to be over-prepared than than underprepared. While a soft landing was the best-case scenario for the economy in 2022, a growth recession is a good backup plan. We also can’t disqualify the possibility of a recession if the labor market doesn’t remain resilient. Whatever happens, investors should do their best not panic and sell off their holdings or try to time the market, which too many of us attempt to do.

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $100 to your account.

Sponsored

Leave a Reply

Your email address will not be published. Required fields are marked *