In this article, you will learn what is a growth recession. 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.
What is a Growth Recession?
A growth recession is when the economy experiences an extended period 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 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 US 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 w 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 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.
Bottom Line
While a soft landing was the best-case scenario for the economy in 2023. 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. This article is about what is a growth recession.
