Recession Dictionary: Your Guide to the Jargon

Recession Dictionary: Your Guide to the Jargon

Here’s what terms like ‘soft landing’ and ‘inverted yield curve’ mean

By Diccon Hyatt  Updated on April 12, 2022  Fact checked by Helen Reis

A few months ago, the fear of a U.S. recession seemed pretty far-fetched. Then inflation got even higher and Vladimir Putin ordered Russian troops into Ukraine, triggering talk of some pretty severe increases in benchmark interest rates, as well as sanctions and supply shortages that threaten to upend the global economy.

Now the word recession is being thrown around a lot, with some economists putting the odds in the 20% to 35% range within the next year or by the end of 2023.1

So what exactly is a recession? And what do government officials, pundits and economists mean when they talk about a soft landing and the inverted yield curve? Here’s a guide for translating the jargon.

Recession

A recession is when activity declines significantly across broad parts of the economy for more than a few months, according to a widely used definition by the National Bureau of Economic Research (NBER), the nonprofit research organization that officially calls the shots on recessions.

In a recession, unemployment goes up, wages go down, and credit becomes harder to come by, damaging people’s lives both in the short and long terms. We had a brief recession when COVID-19 hit in the spring of 2020.2 Before that, there was the Great Recession from December 2007 through June 2009. It was the worst economic disaster since World War II, according to the government—sparked by a housing market collapse that decimated the financial system.3

You may have read that a recession is when real GDP (see definition below) shrinks two quarters in a row. Not necessarily. While recessions are often accompanied by that two-quarter downturn, the recession gurus at the NBER say that doesn’t always apply. Not only do they look at more than just GDP (for example, employment and industrial production statistics) when putting the “recession” label on an economic slowdown, but they look at the depth of the decline.4

So why is there an increased risk of recession now? Because the Federal Reserve has started to deliberately do things to slow down economic growth. It’s part of trying to bring inflation under control, and some people worry that too much of that too fast could actually lead to a decline in economic activity. (The Fed’s main tool is raising its benchmark interest rate to discourage borrowing, and in turn, spending.)

The war in Ukraine has made the Fed’s dilemma worse because sanctions against Russian exports have triggered a spike in oil, and in turn, gasoline prices, and threaten to disrupt the European economy and international trade with the U.S.

Inverted Yield Curve

There’s been a lot of talk lately among experts and pundits about the inverted yield curve flashing warning signs that a recession could be ahead. Here’s the jargon broken down piece by piece.

First, the “yield” part. In this case, the yield refers to yields on government debt, or Treasuries, meaning the expected return for investors factoring in the interest rate and how much they bought the bond for. Typically, the longer the term of the Treasury (how long the investor gets paid interest before their principal is returned,) the higher the yield. That’s because investors usually need to be compensated for the risk they’re taking by lending out their money for longer. In other words, it’s just plain harder to predict what the economy will be like 10 years out than two years out.5

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https://www.thebalancemoney.com/recession-dictionary-your-guide-to-the-jargon-5224220