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Triggers of a recession and how to help your wallet navigate through one

"You don't know that you're in a recession until you're in one."
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Posted at 6:21 PM, Jul 28, 2022
and last updated 2022-07-29 10:13:48-04

BUFFALO, N.Y. (WKBW) — A new report Thursday morning, offers a less-than optimistic view at the short-term future of the economy.

Overall, the economy shrunk to -0.9%, in the second quarter of the year. This is the second straight quarter the nation has seen a negative economic growth.

This often signifies a recession, but that has not officially been declared.

There are some factors that go into what triggers a recession, and the impact this can have on people who are trying to make ends meet.

University at Buffalo Operations Management and Strategy clinical assistant professor, Scott Ptak said, "You don't know that you're in a recession until you're in one."

There are two very different definitions of a recession that get used in the United States.

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One is the "traditional definition", which relies on gross domestic product, or "GDP". Economists would look for two consecutive quarters of negative GDP growth.

Ptak said, "The definition of that is problematic because it's always backward looking. Not only is one quarter in negative economic growth insufficient to qualify us for a recession, but we wouldn't technically know, according to the traditional definition until it has been two consecutive quarters of economic growth."

The second definition, defined by the National Bureau of Economic Research, or "NBER", is usually used for laymen terms. It is a significant decline in activity, that is spread across the economy lasting more than a few months.

The NBER explained this in the case of the February 2020 peak in economic activity. The committee concluded that the subsequent drop in activity had been so great and so widely diffused throughout the economy that, even if it proved to be quite brief, the downturn should be classified as a recession.

Additionally, the Federal Reserve on Wednesday enacted its second consecutive 0.75% point interest rate increase, taking its benchmark rate to a range of 2.25%-2.5%.

This is something Ptak said is an important factor.

Ptak said, "Interest rates are being raised, in order to help stifle demand, somewhat. In other words, to make it more costly for individuals or companies to borrow, in order to do things, like consume and invest. So, the days of 0% interest on car loans or 2.5% interest on your mortgages are now over, at least for the current period."

So are we in a recession? The answer is technically, yes, as of Thursday morning. Ptak verified that for 7 News in a Zoom interview with Pheben Kassahun.

This year's second quarter numbers, which were released Thursday morning, showed GDP fell -0.9%, according to the Bureau of Economic Analysis.

Ptak said, "So, according to the US Bureau of Economic Analysis, we have in the first quarter, a -1.6% decline then in quarter two, we have -0.9% decline. Less of a decline but still a contraction in the economy."

Some are calling it a "technical recession" because it will not be known for sure, until the National Bureau of Economic Research confirms this.

Meanwhile, financial experts explained that allowing credit debt to mount up during a recession is not ideal.

"Really get a full grasp on how much debt you have and how much you're paying in interest every month," Consumer of Credit Counseling Service of Buffalo, Inc. president and CEO, Noelle Carter said. "In the best situation, start paying down that credit card debt, so you're not wasting your income on interest charges."

Carter said it is best to write out a budget of one's monthly expenses to determine what areas can cut down on.

"Things that have a little more wiggle room, such as clothing or eating out, whereas we can't control gas prices or the cost of food," Carter said.

While we are in a period where interest rates remain low on savings accounts Carter suggests looking into investing in a certificate of deposit account.

"That locks in your savings, essentially, for a certain period of time; six months to a year, or 18 months. The longer you are committed to stay within the account, the greater the return on the interest that you get," Carter said.

For more information on how to become financially smart, call the Consumer of Credit Counseling Service of Buffalo, Inc. at (716) 712-2060 or visit its website here.