Is the U.S. in a recession — or heading into one?

A Credit Karma Study

Brad Hanson and Andrew Depietro — June 6, 2022

As fears of economic trouble mount, economists and consumers alike are trying to gauge whether the U.S. is heading into a recession — or could already be in one.

The war in Ukraine, rising interest rates, supply chain disruptions and persistently high inflation — consumer prices rose 8.3% in April compared to the same period last year — are weighing on the economy and could affect the country’s financial stability, according to a May report by the Federal Reserve.

If inflation and higher interest rates begin taking a serious toll on businesses and households, the economy could see a jump in delinquencies and bankruptcies, according to the Fed. More specifically, people could face job losses, higher interest payments and lower home prices as a rise in mortgage rates dampens demand.

The Fed’s report isn’t a forecast — it only identifies potential risks to the economy. But if economic conditions worsen, the U.S. could find itself facing the dreaded “R” word: recession.

Read on for a closer look at recessions and their effects.

What is a recession?

During a recession, the country’s economic output slumps as businesses see sales fall and people lose jobs.

Although a recession is popularly defined as negative gross domestic product (GDP) for two consecutive quarters, it’s the nonprofit National Bureau of Economic Research that analyzes U.S. business cycles — economic expansions and contractions — and officially declares recessions.

What happens during periods of growth? Employment, household incomes, industrial production and sales typically rise — along with GDP. But during a recession, the opposite generally occurs.

According to the NBER, a nonpartisan research organization, a recession is a sharp decline in activity across the entire economy that typically lasts for more than a few months. The NBER considers a wide range of data — including income, employment rates and GDP — to determine whether the economy has officially fallen into recession.

Although the U.S. economy shrank by an annualized rate of 1.5% in the first quarter of 2022, there is not enough evidence — at least not yet — for the NBER to have declared a recession.

A history of recessions in the U.S.

The U.S. has experienced 14 recessions since the Great Depression, according to the NBER. Including the Great Depression, recessions since 1929 have lasted an average of 12.5 months. The shortest recession was the COVID-19 pandemic recession of 2020 that lasted just two months. The longest downturn was the Great Depression of 1929, which lasted more than three years.

Name Period range Duration (in months)
Great Depression August 1929 – March 1933 43
Recession of 1937–38 May 1937 – June 1938 13
Recession of 1945 February 1945 – October 1945 8
Recession of 1949 November 1948 to October 1949 11
Recession of 1953 July 1953 – May 1954 10
Recession of 1958 August 1957 – April 1958 8
Recession of 1960–61 April 1960 – February 1961 10
Recession of 1969–70 December 1969 – November 1970 11
1973–75 recession November 1973 – March 1975 16
1980 recession January 1980 – July 1980 6
1981–82 recession July 1981 – November 1982 16
Early 1990s recession July 1990 – March 1991 8
Early 2000s recession March 2001 – November 2001 8
Great Recession December 2007 – June 2009 18
February 2020 recession February 2020 – April 2020 2

Recessions vs. interest rates

Interest rates typically fall during recessions as the Federal Reserve, the central bank of the U.S., lowers the federal funds rate — the interest rate that banks pay for overnight borrowing in the federal funds market.

Lower interest rates make it easier for consumers to borrow and for businesses to stay open and keep workers on the payroll. This puts businesses in a better position to expand and hire more workers, which will boost employment. In turn, stronger demand for goods and services will increase wages and other costs that influence inflation.

In the last 10 U.S. recessions, the Fed cut interest rates to help stimulate the economy.

Recession Fed funds effective rate when recession started Fed funds effective rate when recession ended
Recession of 1958 3.24% 1.26%
Recession of 1960–61 3.92% 2.54%
Recession of 1969–70 8.97% 5.60%
1973–75 recession 10.03% 5.54%
1980 recession 13.82% 9.03%
1981–82 recession 19.04% 9.20%
Early 1990s recession 8.15% 6.12%
Early 2000s recession 5.31% 2.09%
Great Recession 4.24% 0.21%
February 2020 recession 1.58% 0.05%

Recessions vs. unemployment rate

The unemployment rate usually goes up during a recession, as weak demand for goods and services leads to weak demand for workers.

When the COVID-19 pandemic triggered the most recent U.S. recession, the unemployment rate skyrocketed from 3.5% in February 2020 to a record 14.8% in April 2020 as state and local governments implemented stay-at-home orders in response to the outbreak.

This huge leap in the unemployment rate was sparked by the extraordinary loss of 22.1 million jobs between January 2020 and April 2020. But the economy soon got back on its feet, and the COVID-19 recession became the shortest on record.

Before the pandemic, the U.S. had been enjoying the longest period of expansion in U.S. history. This long stretch of increasing economic activity followed the Great Recession, which started in December 2007 and ended in June 2009.

The unemployment rate during the Great Recession, the most severe U.S. economic downturn since the Great Depression, rose steadily from 5% (December 2007) to 9.5% (June 2009). But the jobless rate didn’t peak until October 2009, when it hit 10%.

Today — even as the U.S. faces economic headwinds — the U.S. Bureau of Labor Statistics reported the unemployment rate for April 2022 at 3.6%, with 5.9 million people on the jobless rolls.

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Recessions and the Treasury yield curve

The slope of the Treasury yield curve is a popular recession predictor with an excellent track record. Before each economic recession since the 1970s, the yield-curve slope has become negative.

The yield curve refers to the relation between short- and long-term interest rates on fixed-income securities issued by the U.S. Department of Treasury. An inverted yield curve happens when short-term Treasury yields exceed long-term yields.

Why might an inverted yield foretell a recession? Normally, the yield on the longer-term 10-year bonds is higher than short-term bonds, since lending money over the long term is considered riskier. The yield curve inverts when investors fear the Fed’s inflation-fighting efforts will bring on an economic slowdown — and that the Fed will ultimately reverse interest rate hikes to jump-start an ailing economy.

In April 2022, the yield on two-year U.S. Treasury bonds exceeded the yield on 10-year bonds. When comparing these two maturities, the yield curve inverted — with yields on two-year Treasury notes hitting 2.44% and 10-year notes hitting 2.38%.

But not all agree on the predictive power of the inverted yield curve. A recent Fed paper said market commentary on the matter is “probably spurious.” In other words, it may not be valid.

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Recessions vs. inflation

A classic overheating economy headed toward a recession has two key elements: unemployment below its “natural” state and rising inflation.

A run-up in inflation is typically seen before a recession — and can be seen before nearly every recession since World War II, except for the 1953–1954 recession, according to the Congressional Research Service.

Today, prices in the U.S. are rising at their fastest pace in four decades. The April consumer price index, which measures what consumers pay for goods and services, increased 8.3% from a year ago, according to the U.S. Bureau of Labor Statistics.

In other words, the average household paid 8.3% more in April 2022 for the same products and services that they purchased in April 2021.

Consumers may find themselves getting squeezed. While total household debt rose by $266 billion in the first quarter of 2022, high inflation is expected to persist for the rest of the year. The nonpartisan Congressional Budget Office estimated that some measures of inflation will begin to ease but that overall inflation will remain higher than normal as demand for goods, services and labor outstrips supply.

On the labor front, economists have generally found that when unemployment drops below a level that is considered natural, the rate of inflation will tend to increase until the unemployment rate returns to its natural rate.

Government figures show that unemployment fell to 5% or lower before all but two recessions since World War II.

What is the Federal Reserve’s role in recessions?

The Federal Reserve acts on its monetary policy to keep the economy healthy. The Fed’s chief goals? Promoting maximum employment, stable prices and moderate long-term interest rates.

To help keep the economy running smoothly, the Fed has a number of tools — including controlling the cost of borrowing money. By raising or lowering the federal funds rate, which is the interest rate for banks, the Fed can affect the economy.

If inflation gets too low, the Fed typically pushes interest rates down to help stimulate the economy. In 2020, the Fed swung into action when fallout from the COVID-19 pandemic threw the nation into recession. By lowering interest rates, the Fed was encouraging businesses to invest and consumers to spend.

On the other hand, when inflation is running hot, the Fed typically raises interest rates to cool down the economy. In May, the Fed approved a half-percentage-point interest rate hike to help slow inflation, which is running at a 40-year high. This raised the central bank’s federal funds rate to a target range between 0.75% and 1%.

How to prepare for a recession

Taking steps to prepare for an economic downturn is one way to strengthen your financial health — whether a recession materializes or not. Here are some tips on saving money to help you weather the rough waters of a possible downturn.

Pay down your credit card balances

There are a number of ways to tackle credit card debt that’ll get your balances to zero. You can either pay off each debt separately or consolidate your debts into a single monthly payment.

You might want to create a repayment plan by implementing either the debt snowball method or debt avalanche method.

The debt snowball method takes aim at your smallest debt first. You’ll need to keep up with the minimum monthly payments on all of your other debts, then put any extra money you have toward paying off the smallest debt. As each debt is paid off, the money that was used for the previous debt is “snowballed” and used to pay the next smallest debt. You can keep repeating this process until all debts are paid off.

The debt avalanche method aims to pay off the debt with the highest interest rate first, while keeping up with the minimum monthly payments on all of your other debts. After eliminating the first debt, you can move on to the debt with the second-highest interest rate — repeating the process until all debts are paid off.

Create a budget

If you’re looking to save money, consider setting a monthly budget and start tracking your spending. The 50/30/20 rule budget is an easy way to manage your funds that doesn’t require you to create detailed budgeting buckets. Rather, you spend 50% of your after-tax pay on needs, 30% on wants, and 20% on savings or paying off debt.

Cancel unnecessary subscriptions

The small monthly fees you pay for subscriptions — which may include gaming apps as well as music- and video-streaming apps — can really add up. Take some time to go through your bank account or credit card statements to target monthly subscription charges that aren’t worth the continued expense.

Shop to save on auto insurance

You don’t need to wait until you receive a renewal notice from your current insurance provider to begin shopping for a new policy. It’s a good idea to shop for car insurance every year to help make sure you’re getting the best rates for your situation.

Avoid credit card interest

With the average credit card interest rate at 14.56% as of February 2022, carrying a balance can be costly. When you carry a balance, your credit card debt goes up. And that debt can weigh you down.

According to the Federal Reserve Bank of New York’s Household Debt and Credit Report from the first quarter of 2022, credit card balances stand at approximately $840 billion. If you want to avoid paying credit card interest charges, pay your credit card bill in full. Credit card issuers generally give you at least a 21-day grace period between the purchase date and the payment due date. If you pay off your balance in full and don’t have any cash advances outstanding, you won’t be charged interest on new purchases made during this interval.

Average credit card debt in America in 2022

Start an emergency fund

An emergency fund is a savings account where you can store cash to help get yourself through a financial crisis — like the loss of your job. You should have enough in your emergency fund to cover three to six months’ worth of expenses if you’re out of work. If you think it might take longer to find another job, consider saving more. If you put away a small amount each paycheck, you can work steadily to reach your goal.

Methodology

This study isn’t meant to be a definitive prediction of whether the U.S. will experience a recession soon. Rather, it’s an exploration of past recessions using key data points to provide insight into the current state of the U.S. economy. Our sources were: