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In macroeconomics, a recession is generally associated with a decline in a country's real gross domestic product (GDP), or negative real economic growth. Macroeconomics is a branch of Economics that deals with the performance structure and behavior of a national or regional Economy as a whole Economic growth is the increase in the amount of the goods and services produced by an economy over time According to one widespread definition, a recession occurs when real growth is negative for two or more successive quarters of a year. However, there are differing definitions: In the United States, the National Bureau of Economic Research's (NBER) Business Cycle Dating Committee ultimately decides whether the economy has fallen into a recession. The United States of America —commonly referred to as the The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales. "[1]

Contents

Attributes of recessions

A recession may involve simultaneous declines in coincident measures of overall economic activity such as employment, investment, and corporate profits. Recessions may be associated with falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as stagflation. Deflation is the opposite of Inflation. Therefore under the usual contemporary definition of inflation 'deflation' means a decrease in the general price level. In economics inflation or price inflation is a rise in the general level of prices of goods and services over a period of time Stagflation is an economic situation in which Inflation and Economic stagnation occur simultaneously and remain unchecked for a period of time A severe or long recession is referred to as an economic depression. Although the distinction between a recession and a depression is not clearly defined, it is often said that a decline in GDP of more than 10% constitutes a depression. [2] A devastating breakdown of an economy (essentially, a severe depression, or hyperinflation, depending on the circumstances) is called economic collapse. Certain figures in this article use Scientific notation for readability An economic collapse is a devastating breakdown of a national regional or territorial economy

Predictors of a recession

There are no totally reliable predictors. These are regarded to be possible predictors. [3]

United States NBER recession criteria

In the US, the judgment of the business-cycle dating committee of the National Bureau of Economic Research regarding the exact dating of recessions is generally accepted. The National Bureau of Economic Research (NBER is a private nonprofit research organization dedicated to studying the science and empirics of Economics, especially the The NBER has a more general framework for judging recessions:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

Because of the way a recession is defined, the beginning (peak in the economic cycle) or end (trough) of a recession can only be identified after the change in the trend has been present for several months. The term business cycle or economic cycle refers to the fluctuations of economic activity during its long term growth trend

The 2001 recession was announced by the NBER in November 2001[9], which later turned out to be the trough. Thus the recession ended the month it was announced by the NBER. In July 1981 the NBER declared an end to a six-month recession from January to July 1980, the last year of Jimmy Carter's presidency. James Earl "Jimmy" Carter Jr (born October 1 1924 was the thirty-ninth President of the United States, serving from 1977 to 1981 and the recipient of the 2002 For the 1981-82 recession, which was during President Reagan's first term, the NBER announced the July 1981 peak in January 1983, and the November 1982 trough in July 1983. [10]

Economist Robert J. Gordon, a member of the NBER committee has stated that any announcement about the start of a new recession starting in 2008 is unlikely before the last few months of 2008 at the earliest[11].

Responding to a recession

Strategies for moving an economy out of a recession vary depending on which economic school the policymakers follow. While Keynesian economists may advocate deficit spending by the government to spark economic growth, supply-side economists may suggest tax cuts to promote business capital investment. In Economics Keynesian economics (ˈkeɪnziən also Keynesianism and Keynesian Theory) is based on the ideas of twentieth-century British economist Deficit spending is the amount by which a government private company or individual's spending exceeds income over a particular period of time also called simply "deficit" Supply-side economics is an arguably heterodox school of Macroeconomic thought that argues that economic growth can be most effectively created using incentives for In Economics, capital or capital Goods or real capital refers to items of extensive value laissez-faire economists may simply recommend the government remain "hands off" and not interfere with natural market forces. Laissez-faire ( pronunciation: French,; English,) is a French phrase literally meaning Let do (“allow to do”

Both government and business have responses to recessions. In the Philadelphia Business Journal, Strategic Business adviser Carter Schelling has discussed precautions businesses take to prepare for looming recession, likening it to fire drill. First, he suggests that business owners gauge customers' ability to resist recession and redesign customer offerings accordingly. He goes on to suggest they use lean principles, replace unhappy workers with those more motivated, eager and highly competitive. Also over-communicate. "Companies," he says, "get better at what they do during bad times. He calls his program the "Recession Drill. " [1]

Central bank response

Usually, central banks respond to recessions by easing monetary conditions, e. g. lowering interest rates. In the United States, the Federal Reserve has responded to potential slow downs by lowering the target Federal funds rate during recessions and other periods of lower growth. In the United States, the federal funds rate is the Interest rate at which private Depository institutions (mostly banks lend balances ( Federal funds In fact, the Federal Reserve's lowering has even predated recent recessions[12]. The charts below show the impact on the S&P500 and short and long term interest rates. The S&P 500 is a Stock market index containing the stocks of 500 Large-Cap Corporations all of which are from the United States.

Siegel[13] points out that cuts in the Federal funds rate are now widely anticipated; thus, cuts are no longer followed by a longer-term rise in stock market indexes. In the United States, the federal funds rate is the Interest rate at which private Depository institutions (mostly banks lend balances ( Federal funds

The declining frequency of recessions in the past two decades and the reduction in declines in GDP suggest that the Federal Reserve has been successful in moderating contractions. However some critics argue that reducing the Federal funds rate has had the effect of adding too much liquidity to the financial markets. In the United States, the federal funds rate is the Interest rate at which private Depository institutions (mostly banks lend balances ( Federal funds

Stock market and recessions

Some recessions have been anticipated by stock market declines. In Stocks for the Long Run, Siegel mentions that since 1948, ten recessions were preceded by a stock market decline, by a lead time of 0 to 13 months (average 5. Stocks for the Long Run is a widely cited book on investment advice by Jeremy Siegel. 7 months). It should be noted that ten stock market declines of greater than 10% in the DJIA were not followed by a recession[14]. The Dow Jones Industrial Average ( also called the DJIA, Dow 30, INDP, or informally the Dow Jones or The Dow) is one of several

The real-estate market also usually weakens before a recession[15]. Real estate is a legal term (in some jurisdictions notably in the USA, United Kingdom However real-estate declines can last much longer than recessions. Real estate is a legal term (in some jurisdictions notably in the USA, United Kingdom

Since the business cycle is very hard to predict, Siegel argues that it is not possible to take advantage of economic cycles for timing investments. Even the NBER takes a few months to determine if a peak or trough has occurred[16].

During an economic decline, high yield stocks such as financial services, pharmaceuticals, and tobacco tend to hold up better[17]. A high yield stock is a stock whose Dividend yield is higher than the yield of any benchmark average such as the 10-Year US Treasury Note However when the economy starts to recover and the bottom of the market has passed (sometimes identified on charts as a MACD crossover), growth stocks tend to recover faster. MACD, which stands for Moving Average Convergence / Divergence is a Technical analysis indicator created by Gerald Appel in the 1960s In Finance, Growth Stocks are Stocks that appreciate in value and yield a high Return on equity (ROE There is significant disagreement about how health care and utilities tend to recover[18]. Diversifying one's portfolio into international stocks may provide some safety; however, economies that are closely correlated with that of the U.S.A. may also be affected by a recession in the U.S.A.[19]. The United States of America —commonly referred to as the The United States of America —commonly referred to as the

History of recessions in the United States

According to economists,[20] since 1854, the U.S.A. has encountered 32 cycles of expansions and contractions, with an average of 17 months of contraction and 38 months of expansion. The United States of America —commonly referred to as the However, they have been shorter and much less common in recent years. Since 1980, there have been only seven recessions (see charts to see how stocks did in these periods). The charts show the impact on stock market indices.

During March 1991 to March 2001, the U.S.A. experienced the longest economic expansion - 120 months. The United States of America —commonly referred to as the An economic expansion is an increase in the level of Economic activity, and of the goods and services available in the market place.

For the past four recessions, the NBER decision has approximately confirmed with the definition involving two consecutive quarters of decline. However the 2001 recession did not involve two consecutive quarters of decline, it was preceded by two quarters of alternating decline and weak growth.

Global recessions

There is no commonly accepted definition of a global recession. A recession is a contraction phase of the Business cycle. The U [21] The IMF estimates that global recessions seem to occur over a cycle lasting between 8 and 10 years. During what the IMF terms the past three global recessions of the last three decades, global per capita output growth was zero or negative.

Economists at the International Monetary Fund say that a global recession would take a slowdown in global growth to three percent or less. By this measure, three periods since 1985 qualify: 1990-1993, 1998 and 2001-2002. [22] International Monetary Fund has recently lowered its 2008 global growth projection from 4. The International Monetary Fund ( IMF) is an International organization that oversees the Global financial system by following the Macroeconomic 9 percent to 4. 1 percent (as measured in terms of purchasing power parity). The purchasing power parity ( PPP) theory uses the long-term equilibrium Exchange rate of two currencies to equalize their Purchasing power. [23]

There is significant speculation about a possible U.S.A. recession in 2008. The United States of America —commonly referred to as the If it happens, it is expected to have a global impact. [24][25][26] U. S. represents about 21 percent of the global economy. Impact of a U. S. recession can spread though the following:[27]

Possibility of a 2008 recession

Further information: Economic crisis of 2008

Since 2007, there had been speculation of a possible recession starting in late 2007 or early 2008. In 2008 the possibility of an economic crisis was suggested by several important indicators of economic downturn worldwide The United States housing market correction (a consequence of United States housing bubble) and subprime mortgage crisis had significantly contributed to anticipation of a possible recession. A United States housing market correction is a market correction or "bubble bursting" of a United States housing bubble; the most recent one started in 2005 The United States housing bubble is an Economic bubble in many parts of the United States housing market including areas of California, The subprime mortgage crisis is an ongoing financial crisis characterized by contracted Liquidity in global credit markets and Banking

While some economists were confident about a recession[28], others were not as easily convinced. [29] While some believed that the current slowdown would at best be a mild and brief recession,[30] there was always an anticipation that the economy may start recovering in the later part of 2008. [31]

The 2008 performance of the U. S. economy is difficult to predict due to the declining house prices and the subprime crisis, the full impact of which is still unclear.

U. S. employers shed 63,000 jobs in February 2008, the most in five years, supporting the view that the U. S. is falling into a recession. [32]. NBER's president, Harvard University economist Martin Feldstein, recently said on March 14, 2008 we are in a recession, though it was not an official NBER declaration[33]. He said the nation has entered a recession that could be the worst since World War II. The economists surveyed by Bloomberg News this month predicted the GDP growth will slow to 0. 1 percent in January to March.

A TrimTabs report on April 1, 2008 suggested a possible ending of recession based on treasury withholding data in very near future[34].

Martin Feldstein, head of NBER said on March 7, 2007: I think that December/January was the peak and that we have been sliding into recession ever since then. I think it could go on longer last two recessions (which) lasted eight months peak to trough". [35]. However former Federal Reserve chairman Alan Greenspan said on April 6, 2008 that "There is more than a 50 percent chance the United States could go into recession. " However Anatole Kaletsky has argued that recession unlikely if US economy gets through next two crucial months[36].

On April 29, 2008, several US states are declared by Moody’s to be in a recession, they are as follows: Rhode Island, Ohio, Michigan, Wisconsin, Florida, Tennessee, California, Nevada and Arizona. Moody's Corporation ( is the holding company for Moody's Investors Service which performs financial research and analysis on commercial and government entities [37]

The US Economy grew in the first quarter by 0. 9%, [38] meaning that the US does not meet the classical definition of a recession and the Commerce Department says the US is "stuck in a rut". However a number of economists still believe the economy is in a recession. [39][40]

Recession and politics

Generally an administration gets credit or blame for the state of economy during its time. [41] This has caused disagreements about when a recession actually started. [42] In an economic cycle, a downturn can be considered a consequence of an expansion reaching an unsustainable state, and is corrected by a brief decline. Thus it is not easy to isolate the causes of specific phases of the cycle.

The 1981 recession is thought to have been caused by the tight-money policy adopted by Paul Volcker, chairman of the Federal Reserve Board, before Ronald Reagan took office. Paul Adolph Volcker (born September 5, 1927 in Cape May New Jersey) is an American Economist Reagan supported that policy. Economist Walter Heller, chairman of the Council of Economic Advisers in the 1960s, said that "I call it a Reagan-Volcker-Carter recession. Walter Wolfgang Heller (1915-1987 was born to German immigrant parents in Buffalo NY The Council of Economic Advisers (CEA is a group of Economists who advise the President of the United States. [43] The resulting taming of inflation, did, however, set the stage for a robust growth period during Reagan's administration.

Causes of recessions

Effects of recessions

See also

Notes

References

  1. ^ The long hangover. Speculation, in a financial context is making an investment that increases the overall risk in a portfolio A currency crisis, which is also called a balance-of-payments crisis, occurs when the value of a Currency changes quickly undermining its ability to serve as In economics inflation or price inflation is a rise in the general level of prices of goods and services over a period of time Government debt (also known as public debt or national debt) is Money (or credit) owed by any level of government either Central government Unemployment occurs when a person is available to work and currently seeking work but the person is without work. Foreclosure is the legal proceeding in which a mortgagee, or other Lienholder, usually a lender obtains a court ordered termination of a mortgagor Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their Creditors Creditors may file a bankruptcy petition against A stock market crash is a sudden dramatic decline of Stock prices across a significant cross-section of a Stock market. Deflation is the opposite of Inflation. Therefore under the usual contemporary definition of inflation 'deflation' means a decrease in the general price level. This is a list of Recessions that have affected the United States. In contemporary Economics, Harry Dent a Harvard graduate and Fortune 100 consultant has popularized the Baby-boomer age-wave theory Baby boomer is a term used to describe a person who was born during the Post-World War II baby boom between 1946 and 1964 Retrieved on 12062008.
  2. ^ Recession? Depression? What's the difference between a recession and a depression?.
  3. ^ A Estrella, FS Mishkin. Predicting U.S. Recessions: Financial Variables as Leading Indicators. MIT Press.
  4. ^ Jeremy Siegel, Stocks for the Long Run
  5. ^ http://online.wsj.com/article/SB116821099838669658.html?mod=mostpop Grading Bonds on Inverted Curve By Michael Hudson
  6. ^ http://www.ny.frb.org/research/epr/forthcoming/0801rose.html Signal or Noise? Implications of the Term Premium for Recession Forecasting
  7. ^ http://blogs.wsj.com/economics/2008/01/28/labor-model-predicts-lower-recession-odds/ Labor Model Predicts Lower Recession Odds
  8. ^ http://seekingalpha.com/article/60871-leading-economic-indicators-suggest-u-s-in-recession Leading Economic Indicators Suggest U. Stocks for the Long Run is a widely cited book on investment advice by Jeremy Siegel. S. In Recession, January 21, 2008
  9. ^ http://www.nber.org/feldstein/bg120401.html From Recession to Recovery
  10. ^ http://www.nationalreview.com/nrof_comment/comment-kaza072403.asp The Umpire Made the Right Call-The recession ended 20 months ago. Period, Greg Kaza, July 24, 2003
  11. ^ http://www.nytimes.com/2008/03/08/business/08recession.html?bl&ex=1205125200&en=bff38e35cdd49324&ei=5087%0A Seeing an End to the Good Times (Such as They Were), DAVID LEONHARDT, March 8, 2008 chart
  12. ^ http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html Historical Changes of the Target Federal Funds and Discount Rates
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  15. ^ http://www.ciovaccocapital.com/sys-tmpl/investingeconomicslowdown/ Housing Has A Strong Correlation To Stocks Chris Ciovacco, September 19, 2006
  16. ^ http://www.washingtonpost.com/wp-dyn/content/article/2007/12/10/AR2007121001589.html Recession Predictions and Investment Decisions by Allan Sloan, December 11, 2007
  17. ^ http://money.cnn.com/2008/02/05/news/economy/recession_invest.fortune/index.htm?postversion=2008020603 Recession? Where to put your money now, Shawn Tully, February 6 2008
  18. ^ http://www.forbes.com/2008/01/28/ibm-hpq-recession-pf-ii_jl_0128money_inl.html Rethinking Recession-Proof Stocks Joshua Lipton 01. 28. 08
  19. ^ http://seekingalpha.com/article/60656-recession-stock-picks-from-morgan-stanley-s-douglas-cohen Recession Stock Picks From Morgan Stanley's Douglas Cohen, January 18, 2008
  20. ^ Business Cycle Expansions and Contractions
  21. ^ http://www.imf.org/external/np/vc/2002/040502.htm The Recession that Almost Was, Kenneth Rogoff, International Monetary Fund, Financial Times, April 5, 2002
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  27. ^ Bloomberg.com: Worldwide
  28. ^ http://recession.org/library/articles/34-articles/51-where-is-the-economy-going Fifteen key economists, policymakers and strategists weigh in on a week of volatility and economic turmoil.
  29. ^ http://www.thestreet.com/s/eight-reasons-there-wont-be-a-recession/newsanalysis/investing/10405444.html?puc=googlefi Eight Reasons There Won't Be a Recession, 02/28/08
  30. ^ http://www.forbes.com/markets/feeds/afx/2008/02/21/afx4682807.html Global Insight believes U. S. in early stage of 'mild and short recession' 02. 21. 08
  31. ^ http://daily.stanford.edu/article/2008/2/27/profsExamineEconomicDecline Profs. examine economic decline, February 27, 2008
  32. ^ http://online.wsj.com/article/SB120489597965119543.html?mod=hpp_us_whats_news Jobs Data Suggest U. S. Is in Recession, By SUDEEP REDDY, March 8, 2008, chart
  33. ^ http://www.bloomberg.com/apps/news?pid=20601087&sid=ag0t9NpkLkz0&refer=home Harvard's Feldstein Says U. S. Economy in a Recession, March 14
  34. ^ http://www.marketwatch.com/news/story/trimtabs-says-economy-added-jobs/story.aspx?guid=%7B77FAFE81%2D4F3B%2D4C36%2DB0A5%2D88F6D9641CBE%7D TrimTabs says it's a recession, but may be ending, Mark Hulbert, MarketWatch, April 1, 2008
  35. ^ http://www.reuters.com/article/bondsNews/idUSN0747602120080407 UPDATE 1-NBER's Feldstein says U. S. sliding into recession
  36. ^ http://business.timesonline.co.uk/tol/business/columnists/article3694545.ece?openComment=true Recession unlikely if US economy gets through next two crucial months
  37. ^ Peoples, Steve. "Analysts say R.I. economy in recession", Providence Journal, 29 April 2008. Retrieved on 2008-04-30. 2008 ( MMVIII) is the current year in accordance with the Gregorian calendar, a Leap year that started on Tuesday of the Common Events 313 - Roman emperor Licinius unifies the entire Eastern Roman Empire under his rule (English) 
  38. ^ http://www.clevelandfed.org/research//trends/2008/0608/01ecoact.cfm,
  39. ^ AVERSA, JEANNINE. "Economy grows by only 0.6 percent in first quarter", Economics, AP, 30 April 2008. Retrieved on 2008-04-30. 2008 ( MMVIII) is the current year in accordance with the Gregorian calendar, a Leap year that started on Tuesday of the Common Events 313 - Roman emperor Licinius unifies the entire Eastern Roman Empire under his rule (English) 
  40. ^ AVERSA, JEANNINE. "Economy grows by only 0.6 percent in first quarter", Economics, AP, 30 April 2008. Retrieved on 2008-04-30. 2008 ( MMVIII) is the current year in accordance with the Gregorian calendar, a Leap year that started on Tuesday of the Common Events 313 - Roman emperor Licinius unifies the entire Eastern Roman Empire under his rule (English) 
  41. ^ http://news.bbc.co.uk/1/hi/business/7215351.stm Economy puts Republicans at risk, 29 January 2008
  42. ^ budget. senate. gov/democratic/press/2003/fs_bushrecession073103. pdf THE BUSH RECESSION, PREPARED BY: DEMOCRATIC STAFF, SENATE BUDGET COMMITTEE,July 31, 2003
  43. ^ http://www.time.com/time/magazine/article/0,9171,922689-2,00.html Ready for a Real Downer, Monday, Nov. 23, 1981 By GEORGE J. CHURCH

External links

Dictionary

recession

-noun

  1. A period of negative, real GDP growth, usually during two consecutive quarters.
  2. The ceremonial filing out of clergy or the choir at the end of a church service.
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