It's tempting to say the U.S. is inching toward a recession, or it's already in one.
Stocks recently hit the lowest levels since the onset of the pandemic when the economy fell into a recession. On top of this, the U.S. economy shrank at a seasonally adjusted annual rate of 1.5% in the first quarter of 2022, according to revised data released Thursday.
This reading comes as inflation is at a 40-year high, forcing Americans to cut back on spending to stay afloat. Yet unemployment is remarkably low. A steep pullback in exports resulting from supply chain bottlenecks had the most significant contribution to GDP last quarter.
And a one-quarter contraction doesn't necessarily mean a recession is on the way.
What does a recession mean?
A recession means there's a significant decline in economic activity.
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There's an unofficial definition that two consecutive quarters of negative GDP mean an economy is in a recession. But the National Bureau of Economic Research, which gives the official ruling on when a U.S. recession started and ended, says a significant decline in economic activity cannot be determined solely by GDP.
Generally, a significant decline in economic activity results from several factors, including high unemployment, a slowdown of goods produced and sold, and wages falling in addition to negative GDP readings, according to NBER.
What will a recession mean?
During a recession, a lot of people tend to lose their jobs. Until they're able to find a new job, they often have to cut back on spending or take on more debt to finance their expenses.
For instance, at the height of the COVID-19-induced recession, nearly 23 million Americans were laid off. This came as businesses were forced to close to curb the spread of the virus, and without customers, employers couldn't afford to pay all their employees.
What happens to stocks during a recession?
Last week the S&P 500 narrowly avoided bear market territory, or a 20% decline from its peak level in January. But as of Thursday, the index is on track to break its seven-week losing streak. That may be quelling some worries that the U.S. is headed for a recession, even though bear markets alone don't mean the economy is in a recession.
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But bear markets "are almost always associated with a recession," said Matt Stucky, senior portfolio manager at Northwestern Mutual. The one exception was Black Monday when the S&P 500 fell into bear market territory over the course of one day. But the economy wasn't in a recession.
On average the S&P 500 losses 32% of its value during recessions, according to research published by RBC Wealth Management.
How long does a recession last?
There have been 12 recessions since World War II that lasted 10.3 months on average.
But there's a wide range. The most recent recession was the shortest ever– lasting just two months, from February to April 2020. The prior recession, also referred to as the Great Recession, lasted 18 months.
Is a recession coming in 2022?
It's unlikely that a recession will occur this year, economists say. But unlikely doesn't mean it's definitely out of the cards.
Deutsche Bank economists predict "we will get a major recession" beginning in late 2023 or early 2024. That marks a shift in tone from last month, when the economists predicted a "mild recession." They said in a note published earlier this month that the recession is likely going to be more significant since it "will be a long time" before inflation returns to the Fed's 2% target.
That means the central bank will need to take an even more aggressive stance on raising interest rates to clamp down on inflation. But raising rates can backfire because it can cause consumers and businesses to spend less as it becomes more expensive to borrow money when interest rates on mortgages, credit cards and other loans increase in tandem.
However, PNC chief economist Gus Faucher said earlier this month "the U.S. economy is not anywhere close to recession."
"Underlying demand remains strong, and the labor market is in excellent shape. Growth will resume in the second quarter."
Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here
This article originally appeared on USA TODAY: What happens to the stock market during a recession?