The COVID-19 pandemic caused economic disruptions that could lead to a recession in some industries. Chief Executive Officers in the United States and worldwide feel that slow growth and a recession are their top external worry for 2023. In fact, 60 percent of U.S. leaders don’t expect economies to revive until late 2023 or mid-2024. At the same time, the pandemic spurred changes in the way that people work and consume goods and services, which could lead to a resetting of the economy in the long term. Therefore, you may wonder if we are experiencing a recession or a resetting.
Signs of a recession
Almost two-thirds of economists surveyed by the World Economic Forum predict a recession in 2023. A recession is typically defined as a period of economic decline characterized by a decrease in Gross Domestic Product (GDP), increased unemployment rates, and reduced economic activity lasting at least several months. The signs of a recession can vary, but some common indicators include:
1 – A decrease in Gross Domestic Product (GDP): GDP is the total value of goods and services produced within a country’s borders. A decline in GDP for two consecutive quarters is generally considered a sign of a recession. The U.S. GDP has increased 34 percent year over year. The Bureau of Economic Analysis reports the following GDP changes:
- Quarter three 2022: +3.2 percent
- Quarter four 2022: +2.6 percent
S&P Global expects “U.S. GDP to decline by 0.3 percentage points from its peak in the first quarter 2023 to its third-quarter trough. If correct, this will beat the 2001 recession as the softest recession in recent history since 1960.”
2 – Rising unemployment: During a recession, many businesses may cut jobs or close entirely, leading to higher levels of unemployment. In the first quarter of 2023, we have seen the lowest unemployment rate in a half-century, with layoffs up nearly fivefold. In the second quarter of 2020, the unemployment rate went as high as 7 percent and has steadily declined. In March 2023, the unemployment rate was at 3.5 percent—matching the first quarter 2020 pre-pandemic rate—and has fluctuated between 3.5 and 3.7 percent since March 2022.
In the first quarter of 2023, job cuts increased 396 percent from the same period a year ago. The tech industry laid off the most workers, but several other sectors have been affected, including e-commerce, media, and Wall Street. Historically, during recessionary times, we have seen some industries thrive and even grow, including healthcare, financial services, auto repair, stores—home maintenance, grocery, and discount—freight and logistics, utilities, and property management.
3 – Decreasing stock prices: As investors become more pessimistic about the economy, stock prices may decline, reducing consumer and business confidence and leading to further economic contraction. The S&P 500 is up around 7 percent for the year, and there is optimism that the worst may be over.
4 – Decreased consumer spending: As people become more uncertain about their financial situation, they may cut back on spending, which can further reduce economic activity. A February PWC Survey found:
- 96 percent of global consumers plan to adopt cost-saving behaviors over the next six months
- 42 percent expect to significantly decrease their spending across all retail categories to include less travel and switching to less expensive product brands
- 24 percent plan to decrease spending on groceries
5 – Declining business profits: As demand for goods and services decreases, businesses may see their profits decline, leading to further job cuts and reduced investment. Corporate profits in the U.S. fell 7 percent in the fourth quarter of 2022, after a 0.8 percent gain in the previous period. The S&P 500 first-quarter 2023 earnings decline was -6.6 percent.
Related: How to Create a Recession-Ready Talent Strategy
Based on the above common indicators, two out of five (decreased consumer spending and profits) point toward a recession. It’s important to note that these indicators are not always present in every recession, and some may be more pronounced than others. It’s also worth noting that economic indicators can be lagging, meaning that they may not fully reflect the current state of the economy until several months after the fact.
Signs of a resetting
A resetting can refer to a fundamental change in the economy’s structure or how people work and live, often driven by technological advancements or shifts in societal values. The pandemic has had far-reaching impacts beyond just health and safety concerns. Many people lost jobs or experienced financial hardship, significantly affecting the global economy. What we are experiencing may not be a recession but, a resetting back to an altered form of pre-pandemic life.
Change in how people work: The pandemic has caused significant changes in how people work and accelerated trends already underway.
- With the widespread adoption of remote and hybrid work, many employees had to adjust to working from home or other remote locations. This created blurred lines between work and personal life for many workers, leading to an increased need for work-life balance and self-care practices.
- Organizations increasingly turned to digital solutions to help manage remote workforces and maintain business operations during lockdowns and other restrictions.
- This shift also required new skills and tools, such as virtual communication platforms and online collaboration tools.
The Great Resignation: The Great Resignation is a term used to describe the trend of employees leaving their jobs—a record 47.8 million in 2021 and 50.5 million in 2022—in large numbers. The pandemic caused many workers to re-evaluate their work-life balance and priorities and change their career paths. In return, employers have shifted their focus to increased workplace flexibility, upskilling, and corporate culture, significantly reshaping the labor market and how companies approach talent retention and recruitment.
Compensation adjustments: Companies increased salaries or offered other incentives during the Great Resignation in industries with worker shortages. Many employers stretched their salary guidelines to attract new workers or make counteroffers to employees threatening to quit creating inequity and pay gaps within teams. Employers in the retail (5.0 percent) and restaurant and bar (7.5 percent) industries are still increasing average hourly earnings to counteract labor shortages.
Related: Pay Up or Lose Out: How Hiring a New Employee is a Lot Like Buying a New Home
Lack of demand: We are now seeing the U.S. job market showing signs of softening as rising interest rates and slowing economic growth affect hiring. With decreasing consumer spending causing declining business profits, job cuts increased 396 percent from the same period a year ago. Organizations choosing not to enact hiring freezes and layoffs use quiet hiring to acquire new skills without hiring new full-time employees. In fact, 80 percent of workers have been quiet hired. According to Gartner, the three main components of quiet hiring include:
- Keep headcount the same while focusing on internal talent mobility to address the highest priority items.
- “Stretching assignments and upskilling” current employees’ abilities.
- Using alternative approaches, “such as leveraging alumni networks and gig workers,” for specific talent on an as-needed basis.
The bottom line
While a recession and a resetting can sometimes coincide, they are distinct phenomena, and the current economic situation may involve elements of both. The pandemic has significantly impacted the labor market, leading to job losses, business closures, and changes in work arrangements. While demonstrating signs of recovery, it is still uncertain how long-lasting the effects of the pandemic will be on employment and the economy as a whole. While economists can provide insights and predictions based on available data and research, the complexity and dynamism make it challenging to define in simple terms and predict with complete certainty.
This blog was written by Carl Kutsmode.