In economics, the term recession generally describes the reduction of a country's gross domestic product (GDP) for at least 2 quarters. [1][2] The usual dictionary definition is "a period of reduced economic activity", a business cycle contraction. [3][4]
The U.S.-based National Bureau of Economic Research (NBER) defines economic recession as: "a significant decline in [the] economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales."[5]
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In macroeconomics, a recession is a decline in a country's gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year.
An alternative, less accepted definition of recession is a downward trend in the rate of actual GDP growth as promoted by the business-cycle dating committee of the National Bureau of Economic Research.[1] That private organization defines a recession more ambiguously as "a significant decline in economic activity spread across the economy, lasting more than a few months." A recession has many attributes that can occur simultaneously and can include declines in coincident measures of activity such as employment, investment, and corporate profits. A severe or prolonged recession is referred to as an economic depression.
There are no completely reliable predictors. These are regarded to be possible predictors.[6]
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. Laissez-faire economists may simply recommend that the government not interfere with natural market forces. Populist economists may suggest that benefits for consumers, in the form of subsidies or lower-bracket tax reductions are more effective and serve a double purpose including relieving the suffering caused by a recession.
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." [13]
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 5.7 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 real-estate market also usually weakens before a recession[15]. However real-estate declines can last much longer than recessions.
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 National Bureau of Economic Research (NBER) takes a few months to determine if a peak or trough has occurred in the US[16].
During an economic decline, high yield stocks such as financial services, pharmaceuticals, and tobacco tend to hold up better[17]. However when the economy starts to recover and the bottom of the market has passed (sometimes identified on charts as a MACD [18]), growth stocks tend to recover faster. There is significant disagreement about how health care and utilities tend to recover[19]. 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.[20].
There is a view termed the halfway rule [21] according to which investors start discounting an economic recovery about halfway through a recession. In the 16 U.S. recessions since 1919, the average length has been 13 months, although the recent recessions have been shorter. Thus if the 2008 recession is an average one, the downturn in the stock market should bottom around November of 2008. However some economists fear that this recession may last longer.
Generally an administration gets credit or blame for the state of economy during its time.[22] This has caused disagreements about when a recession actually started.[23] 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. 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.[24] The resulting taming of inflation did, however, set the stage for a robust growth period during Reagan's administration.
It is generally assumed that government activity has some influence over the presence or degree of a recession. Economists usually teach that to some degree recession is unavoidable, and its causes are not well understood. Consequently, modern government administrations attempt to take steps, also not agreed upon, to soften a recession. They are often unsuccessful, at least at preventing a recession, and it is difficult to establish whether they actually made it less severe or longer lasting.
Understanding of the word "recession" differs between economists, newspapers, and the general public. Generally speaking, a recession is present when graphs are sloping down in respect to production and employment. Consequently, a politician can truthfully say "the recession is over," even though little has improved. This may imply to the public that the economy is in recovery, suggesting the graphs are sloping upward, though there may actually exist a period of stagnation, when numbers remain low even though they are no longer dropping.
There is no commonly accepted definition of a global recession, IMF regards periods when global growth is less than 3% to be global recessions.[25] 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.[26]
Economists at the International Monetary Fund (IMF) state 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.
According to economists, 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[27]. However, since 1980 there have been only eight periods of negative economic growth over one fiscal quarter or more[28], and three periods considered recessions:
From 1991 to 2000, the U.S. experienced 37 quarters of economic expansion, the longest period of expansion on record.[28]
For the past three recessions, the NBER decision has approximately conformed 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.[28]
Since 2007, there had been speculation of a possible recession starting in late 2007 or early 2008 in some countries.
In January 2008, the IMF predicted that 2008 global growth would fall from 4.9 percent to 4.0 percent (as measured in terms of purchasing power parity), however 2 months later it was announced that this projection was not low enough.[29]
There was significant speculation about a possible U.S. recession in 2008. If such a recession happened, it was expected to have a global impact.[30][31][32] The U.S. represents about 21 percent of the global economy, and impact of a U.S. recession could spread through the following:[33]
The United States housing market correction (a consequence of United States housing bubble) and subprime mortgage crisis has significantly contributed to a recession.
U.S. employers shed 63,000 jobs in February 2008, the most in five years. 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." [34]. On October 1st, the Bureau of Economic Analysis reported that an additional 156,000 jobs had been lost in September. On April 29, 2008, nine US states were declared by Moody’s to be in a recession. [35]
Although the US Economy grew in the first quarter by 1%, [36] [37] by June 2008 some analysts stated that due to a protracted credit crisis and "rampant inflation in commodities such as oil, food and steel", the country was nonetheless in a recession.[38] The third quarter of 2008 brought on a GDP retraction of 0.5%[39] the biggest decline since 2001. The 6.4% decline in spending during Q3 on non-durable goods, like clothing and food, was the largest since 1950.[40]
A Nov 17, 2008 report from the Federal Reserve Bank of Philadelphia based on the survey of 51 forecasters, suggested that the recession started in April 2008 and will last 14 months [41]They project real GDP declining at an annual rate of 2.9% in the fourth quarter and 1.1% in the first quarter of 2009. These forecasts represent significant downward revisions from the forecasts of three months ago.
A December 1, 2008, report from the National Bureau of Economic Research stated that the United States has been in a recession since December 2007 (when economic activity peaked), based on a number of measures including job losses, declines in personal income, and declines in real GDP.[42] It could be worse than the 1981-1982 recession.
A few other countries have seen the rate of growth of GDP decrease, generally attributed to reduced liquidity, sector price inflation in food and energy, and the US slowdown. These include the United Kingdom, Japan, China, India, New Zealand and the eurozone. In some, the recession has already been confirmed by experts, while others are still waiting for the fourth quarter GDP growth data to show two consecutive quarters of negative growth.