What led us to the current economic recession?

October 31, 2022
Posted in Recruitment
October 31, 2022 Virtual Employee Services

An insight into today's economy

To understand today’s economic behavior clearly, it’s necessary to look a few years back and understand how certain factors have led us to an economic slowdown and possible recession in 2022. The world has taken several hits, starting with COVID-19. Two years in and we are still struggling to meet an end to the outbreak. In the midst of overcoming the pandemic, we are experiencing other types of outbreaks like monkeypox. To add to the number of hits, while trying to have control of these outbreaks, there’s also a possible nuclear war whose protagonists are Russia and Ukraine with third parties’ participation that can highly influence the decision-making of how vast of an impact this war can be on the world’s economy. The war affects most, if not all, the parties involved in the powerful G7 economies by affecting the food and financial cycle. This also leads to affecting emerging and underdeveloped countries’ economies.

What does a recession mean?

An economic recession is just one of the phases of the business cycle of any economy. This phase rises when the economy registers a decrease or negative growth in its economic activity for two consecutive quarters. It directly affects the economic output, consumer demand, and employment.

In the US the entity in charge of studying and determining the economic forecast is the National Bureau of Economic Research (NBER), a private nonprofit organization.

What causes a recession?

Now that we have identified what is an economic recession, let’s briefly go over some of the factors that can cause it.

  • An unexpected economic shock:
    Refers to events that happen suddenly such as wars, outbreaks, and natural disasters. A recent example of this can be the COVID-19 outbreak and the war between Russia and Ukraine.
  • Excessive debt:
    This happens when individuals and businesses take on too much debt and grow their debt to the point where they can no longer sustain it. This leads to bankruptcies. A great example of this was the housing bubble that led to the Great Recession. There was an excessive amount of money being led to house owners who could not pay their mortgages and monthly payments.
  • Asset bubbles
    These consists of buying in an excessive manner, housing, stocks, or gold leading to a dramatic rise in price in a very short period, and the rise is not caused by the value of the product itself. For example, in the stock market, when investors continue to invest in an asset without keeping in mind its real value and are driven by confidence that the price of the asset will keep going up, causes the bubble to burst. Once this happens, they desperately start selling at prices below the asset’s real value. Irrational exuberance is usually how a stock market crash can cause a recession.
  • Too much inflation:
    Banks control inflation by raising interest rates and controlling economic activity. An example of what happens when inflation is too high, the profit margins of companies start to decline. Companies start taking measures to save profit and what they usually do is lay off workers. When there are people without jobs, they are less inclined to not spend unnecessarily on goods and services, slowing down the economy and on some occasions leading to a recession.
  • Too much deflation
    is when the prices of goods and services are constantly decreasing usually accompanied by a fall in demand, wages, investments, and employment.

During the pandemic, the economy experienced an extreme slowdown and there was a very low circulation of money in response to the low demand. A lot of individuals lost their jobs because the pandemic also affected the supply chain and transportation of goods. There was a need to take an action to stimulate the economy and reactivate the circulation of money. The Federal Reserve proceeded to print more money, and a pandemic subsidy was provided to individuals. They created money at a record rate. This was intended to encourage individuals to consume more goods and services and boost the economy.

Just considering the total cost of COVID, as of March 2021, it was roughly $5.2 trillion. Now keep in mind that World War II cost $4.7 trillion in current dollar value. ( Source:  Nasdaq) Numbers are facts and help us have a wider idea of how important the impact of COVID monetary wise in the economy.

The total amount of money printing reaches a total of $13 trillion, consequently contributing to the inflation we know today.

The effect of the COVID relief on consumer behavior also gives us an insight into how we arrived at our current economic situation. Individuals with subsidies started to spend more than some companies could offer. We were experiencing an increase in demand, and fewer individuals are interested in working which doesn’t help once again the supply chain. This causes some businesses to take measures, such as rising their prices on the final good and services.

On a bright note, prices seem to be declining; shipping costs and times have also started to moderate considerably. The key part of the economy is US consumer spending Inflation is inevitable but if it is controlled and it’s at a modest rate it can be good for the economy since its main objective will always be to circulate money.

Job Market

A study done by Pew Research in 2021, stated that at the beginning of 2020 when coronavirus first impacted the US, around 9.6 million workers lost their jobs due to businesses closing and a huge number of employers declared themselves in bankruptcy. During this time the United States experienced an increase in the unemployment rate of approximately 15 percent between February and April 2020 according to the U.S. Bureau of Labor Statistics (BLS).

As of today, there are around 6 million Americans unemployed, and the uncertainty of the decision-making of the Feds when it comes to continuing to tighten the interest rate is something to pay close attention to and to be concerned about. The shortages in the labor market and its future behavior are uncertain as well and it seems as if it’s going to continue this way until the second quarter of 2023. It seems there are likely to be layoffs and corporate cutbacks for next year. It’s time to make smart financial decisions and change some consumption habits.

On a good note, there might be a raise of approximately 4 percent in the salary of the employees for 2023, they’re considering three types of raises for workers: cost-of-living adjustments which are directly related to general increases in compensation to keep pace with inflation; increases based on an employee’s performance; and market adjustments which are salaries that need a raise to match with the other employees and markets.

When experiencing budget decreases or high cost-per-hire a great option for companies during this time is to outsource their recruiting and hiring process. With recruitment outsourcing they reduce time and resources cost, allowing them to focus on other high-priority matters in other departments such as finance, production, or technological upgrades.

At Virtual Employee Services you can find just the type of service that you need to reduce your hiring and recruiting process fees. We have several teams of experts in different areas and verticals in several industries. We work with industries such as hospitality, technology, manufacturing, and finance. We help our clients especially in difficult times like a recession to save on recruitment costs by working hand in hand with our team of specialized recruiters. Which have a clear overview of the labor market since they are constantly talking to candidates and analyzing their current needs. We help clients not only save time but also make their hiring process more efficient, they don’t have the need to train a recruiting team on specific job requirements.

What to do in a recession?

Recessions are inevitable since they are part of a healthy economic life cycle. Now, it’s always a good idea to know what to do in this type of situation since it’s not the first time it happens, and it most definitely won’t be the last. Let’s review what we should keep in mind to have a stable financial life during this period.

  • Savings
    Let’s not wait until the world’s economy is going through a rough patch to consider having a saving account. This a tip we should implement in our daily life since it will always help us through difficult times. Set a goal of the amount you’re able to save based on your earnings and monthly expenses. The ideal is to have at least from 3 to 6 months’ worth of savings. Experts also recommend only spending 30 percent of your income, especially during an economic crisis with the objective of not overspending your earnings. Remember to plan for any recurring expenses such as rent, insurance, and cell phone bills.
  • Debt:
    Prioritize paying your debts, it can be a heavy burden during the recession period. Interest rates go up during an economical crisis and it is not good for your finance to have debts during this time. By paying them off your monthly expenses go down and you don’t have to worry about any additional payments. In addition, any external impact on your income could affect your ability to pay your debts.
  • Budget
    It’s important to learn to have a budget and not spend more than you earn. It can help you stay within your budget if you start cutting costs and unnecessary spending habits. It is best to try to economize your income by knowing how to distribute it wisely. Since we already know how much inflation contributes to the recession and how prices of everything rise, -we can always try to include in our budget costs like gasoline, household goods, and groceries. The money you’re saving from cutting down on expenses may help you boost your emergency funds.
  • Extra Income:
    If you have the possibility to have several streams of income so that you don’t have to rely on one specifically it’s the best way to go. Make sure to keep your resume updated and investigate different job opportunities, maybe an online business, freelance jobs, or investing in bonds.
  • Diversify your investments
    Another way to keep your finances stable during a recession is to invest in different firms and different classes of assets so that when there’s negative behavior in a particular investment your other assets are doing well and the impact on your losses won’t be so tough. Other types of assets you can invest in are for example real estate, this type of asset tends to appreciate over time.

In conclusion, a recession is part of the economic cycle, and we just have to learn to work and live around it by educating ourselves on how to act and improve our finances, so we don’t have to experience a huge impact in our pockets when the economy is experiencing high inflation and prices start to go up. This will continue to happen throughout the years, and we will continue to face this type of situation. Staying positive and making smart financial decisions will help us stay more at ease. We all grow and learn from this type of situation and with experience, we will learn to forecast a recession to make the smartest and most convenient decision at that time.

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