Not All Recessions Are the Same

Over the course of one year, small chirps of a possible recession have gradually turned into a loud roar. Now, nearly every economist has their own forecast of when and if the U.S. economy will enter a recession—and how severe it might be. But we’ve learned that the definition of a recession is not concrete and that all recessions look different.

The textbook definition of a recession is two consecutive quarters of negative economic growth, a standard the U.S. met in 2022 when GDP fell 0.6% in Q1 and 1.6% in Q2. However, the National Bureau of Economic Research did not declare an official recession since other indicators, like unemployment, told a more positive story about the economy.

Conflicting Economic Indicators

• Inflation is at 6.4%, according to the January Consumer Price Index report.
• Unemployment is at a 54-year low of 3.4%.
• NACM’s Credit Manager’s Index (CMI) sits at 51.3, close to contraction territory.
• The Federal Reserve has raised interest rates to a range of 4.50% to 4.75%.
• Home sales fell for the twelfth straight month in January with a 37% year-over-year drop, the biggest decline since 2010.

As we approach the end of Q1, certain industries are already feeling economic pressure. “Regardless of whether an actual recession is declared soon, U.S. businesses are experiencing an economic contraction now,” said NACM Economist Amy Crews Cutts, Ph.D., CBE, in January’s Credit Managers’ Index report.

So, what are the different types of recession?

Rolling Recession

The term “rolling recession” has made headlines in recent weeks as more economists think this is the type of recession the U.S. may be experiencing. This type of recession acts exactly how it sounds. “A rolling recession—where various sectors of the economy take turns contracting rather than simultaneously—is in progress,” wrote Sung Won Sohn, professor of finance and economics at Loyola Marymount University and chief economist of SS Economics, in a note last week.

For example, businesses in manufacturing may experience economic hardship at a different time than those in the service industry and well before it hits consumers. “We continue to think the economy will suffer from rolling recessions, evidenced by the fact that corporate earnings growth is now entering its downturn,” said Liz Ann Sonders, chief investment strategist with Charles Schwab.

K-Shape Recession

A K-shaped recession is slightly different from a rolling recession in that one sector remains completely untouched from hardship while the other enters into a full-blown recession. “Another potential factor for a K-shaped landing could be the growing pressure on small businesses, which have less wiggle room than bigger companies in managing costs,” reads an article from The New York Times. “Small employers are also more likely to be affected by the tightening of credit as lenders become far pickier and pricier than just a year ago.”

Double-Dip Recession

Also known as a W-shaped recession, this occurs when the economy relapses into a recession shortly after recovering from the first. This can be particularly painful when businesses and investors jump back into what they believe is a recovered market before another plummet. This shape of economic downturn last occurred in 1980—but it could happen again if the Federal Reserve is not aggressive enough in raising interest rates.

Soft Landing?

The last time the Fed was able to curb inflation without driving the economy into a recession was in 1994. In a series of seven rate hikes beginning in February 1994 and ending one year later, policymakers doubled interest rates to 6%. “The result was successful,” reads an article from Vox. “The economy averted a recession, inflation stabilized around 3% before drifting down and unemployment continued to fall for most of the late 1990s. Although economic growth weakened in the first half of 1995, it later rebounded, and a period of strong expansion followed.”

But the situation today does not look as promising. Despite the fact that inflation has eased in recent months and the unemployment rate remains low, economists put the probability of a recession in the next year at 61%—up from 18% at the start of 2022, according to a Wall Street Journal survey. The pandemic, the war in Ukraine and supply chain challenges are just a few factors making it much more difficult for the Fed to pull off a successful soft landing. “Very few think we can avoid a recession altogether,” Cutts said.

The economy will likely change by summer. Credit professionals need to stay ahead of any new economic developments during this volatile time. Join us in-person at Credit Congress from June 11-14 to hear from several experts, including Cutts and an expert from the Federal Reserve Bank of Dallas, speak on the state of the economy.