U.S. Commerce Secretary Howard Lutnick recently suggested that experiencing a recession could be beneficial for implementing President Trump’s economic strategies. Treasury Secretary Scott Bessent referenced a potential “detox” period, while Trump described the current economic situation as one of transition. Regardless of the terminology, historical data indicates that recessions can have significant and unequal costs, and outcomes, including recovery length and depth, are often unpredictable. A recession is typically identified when the Gross Domestic Product (GDP) of a country declines over two consecutive quarters.
However, the National Bureau of Economic Research (NBER) takes a broader view, considering factors such as unemployment, consumer spending, and industrial production, all of which can fluctuate for an extended period without an official recession being declared. The NBER does not announce recessions in real time, leading economists to analyze changes in unemployment rates or other indicators to infer the economy’s status. As of early January, the likelihood of a recession seemed low, supported by low unemployment rates and rising wages prompting consumer spending. Although the Federal Reserve had cut interest rates to foster growth, concerns arose from uncertainties surrounding Trump’s trade policies and their potential impact on global economic stability.
Shocks to the economy can arise from various sources, including the pandemic and trade policy volatility. Recessions incur several costs, such as plummeting business profits and rising unemployment, which disproportionately impacts marginalized communities. Historically, downturns such as the one from 2007-2009 were particularly severe, while the recent pandemic effects were felt heavily in the service sector. On a positive note, recessions could help reduce inflation as demand wanes.
Despite current worries about stagflation, a significant downturn typically leads to lower prices. Additionally, falling interest rates during a recession could benefit potential homebuyers and aid in economic recovery.