Amusing Ourselves in a Dawn of Recession

Sumber: dokpri

For Q1 2025, the U.S. Bureau of Economic Analysis (BEA) officially announced that the U.S. has their first contraction of their GDP since the recovery from Covid-19. However, that's not the only concerning fact. Within a couple of months, they already revised the number down to a 0.5% decrease in GDP, 0,2 percentage point lower than their first estimation and Former Federal Reserve economist, Claudia Sahm, said “the downward revision to consumer spending today is a potential red flag.” As a common rule of thumb, a recession normally means a decrease in GDP numbers for 2 quarters in a row, so this means the United States is closer to another recession than ever. However, what if we are already in a recession?

In the Dawn of a Recession

Let's take the example of the previous recession. People were aware they were in a downturn around September 2008, after one of the biggest banks in America at that time, Lehman Brothers, fully collapsed. On that day, The Guardian described it as “Heralding a tumultuous day,” causing thousands of people to become unemployed and the biggest shock to the financial world in years. 

December 1st, 2008, National Bureau of Economics Research (NBER) officially announced that the U.S. is in recession. If you follow the common rule of thumb, it makes sense because Q4 2008 marked a contraction for two quarters in a row, but the most interesting part is that NBER found that the recession had already started a year ago. December 2007 is found to be the start of the recession and general decline of economic activity, and of course they didn’t use the rule of thumb to determine a recession. They didn’t just rely on real GDP numbers alone; they also used other metrics like employment, income, and total production the economy made. Because of this, an official announcement of recession can have months, or in this case even a year worth of delay to fully analyze all that data.

Source: How did the recent GDP revisions change the picture of the 2007–2009 recession and the recovery? (BEA, 2011)

When you look at the GDP numbers as well, the BEA continued to revise them downward for 3 years in a row. The graphic shows the lowest trough at the 2008 recession goes from -5,4% from the BEA early calculation to -8,9% at the 2011 revision, showing that the people and even the goverment don't fully understand how bad the situation is in the middle of the recession. 

So are we in a recession? We can only speculate with the data we have, so let’s see how we can determine if we are in a recession or not. U.S. LEI or Leading Economic Index is an index released by The Conference Board, calculating 10 leading economic indicators to show where the economy will lead a couple of months in the future. Even though LEI was not used then, the formula could predict the dot-com bubble and the Great Recession. The recession signals have now hit for 3 months in a row, suggesting a growing headwind in the economy. There is also the Sahm rule, another recession indicator that correctly predicted the dot-com bubble and the 2008 recession, where we use the changes in unemployment, so when the unemployment number increases by 0.5% in 3 months in a row, it already happened in September 2024 (Fred, 2025). 

Then what the experts suggest, you might ask. JPMorgan recession probabilities for 2025 are hovering around 40% to 60% for the past couple of months and fully expect at most a weak growth for the rest of the year. Deloitte on their Q2 2025 forecast also predicted the US can fall to recession in 2025 if inflation worsen and trade wars happen.

Slowly Then All at Once

“Even if the economy leads to another downward spiral, life still feels normal so far. I can still enjoy the food I like, go hangout with my friends, and I can still see people around me spending on expensive items. I know overall life becomes more and more expensive, but I don’t really think a recession can randomly come tomorrow without a very clear signal, so I can prepare, right?” Someone might assume this is probably the case, yet it's so far from the truth.

“How did you go bankrupt?"

Two ways. Gradually, then suddenly.”

― Ernest Hemingway

The Quotes come from Ernest Hemingway in his book The Sun Also Rises, and he describes bankruptcy as a slow process where small and mostly invisible problems gradually stack on top of each other until at some point it reaches a certain threshold where it instantly collapses. 

There is also a similar phenomenon in statistical physics called the tipping point, and it's a critical threshold where a small change in a system can trigger a significant and often irreversible shift in behavior or outcomes, and it may have some weight to be linked to the economy. Gualdi, Tarzia, Zamponi, and Bouchard (2014) found that there is also a tipping point in the economy. They found that in normal situations, a small change to interest rates does barely anything, yet when the economy is near this threshold, it can instantly cause system-wide unemployment to spike. A similar idea is also expressed by Mark Buchanan in his book Ubiquity: The Science of History, or Why the World is Simpler Than We Think. In the book, he described the 1987 stock market crash as a pile of sand. Every grain comes from the humans that participate, and each one of them can either cause a small, or if it falls in the wrong place and time, can cause a massive avalanche destroying the whole pile (Cornell, 2019).

So let's take the 2008 recession as an example again. On March 28, 2007, Ben Bernanke, Federal Reserve Chairman at that time, said he did not believe the U.S. economy was heading into a recession, stating explicitly that he saw “no recession on the horizon” (CBS, 2007). In December 2007, Ian Scott, from Lehman Brothers, a company that would collapse eight months later, said, “in a worst‑case scenario of recession and falling corporate profits, the stock market would likely fall no more than 10% to 15% from then‑current levels (Barrons, 2007). Rebecca Blank, a respectable economist who would later become Secretary of Commerce in the Obama administration, in March 2008, in the middle of the recession, wrote:  “If the economy’s so bad, why is the unemployment rate so low?” If you read this at that time, of course, you would assume the best will happen, there will be no recession, and even if the worst comes to happen, it would not be as much different from before, yet that's not what really happened.

In September 2008, Lehman Brothers collapsed, an occurrence that got the blame for 2008 Recession because the before and after feels like night and day. In the same month, AIG, the biggest insurance company in the US, needed to be bailed out, and Washington Mutuals declared bankruptcy. The next month, Dow Jones and S&P 500 experienced a 20% decrease in valuation, the worst in history, and 240.000 jobs were shed, leading to 10% unemployment for that year. This shows how fast a situation can change by a single event.

Can We Survive Another Recession?

The biggest reason the U.S. can fully recovered from the financial crisis is mostly because of aggressive stimulus and bailout which easily cost them more than $1,2 Trillion USD (Lucas, 2019; CBO, 2015). With how the economics are currently, I cannot imagine the U.S. pulling this kind of fund again. The U.S. debt ratio is at an alarming rate of 124,3%  and the interest alone can eat up to 20% of US spending; they don't have more room to spend (CRFB, 2024). If the next recession hits, there is no guarantee the U.S. will leave as unscathed as before. Neil Howe in his book The Fourth Turning is Here, argues that the 2008 recession has not met its conclusion and its climax has yet to arrive. The next recession might be the hardest-hitting financial crisis for the current saeculum.

With this information, how do we need to react? We are heading to one of the most uncertain times in our history. When all the recession indicators are turning red, no person can guarantee you whether the economy will go up or turn the other way. Whether it happens or not, we can only prepare for our future. Spend less and try to save more, stop getting more debt, and if you have stable income, don't try risky ventures so even when it comes to the worst, we are fully prepared to withstand the impact.

Reference

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