A recession is a contraction phase of the business cycle. A common rule of thumb is that a recession occurs when real gross domestic product (GDP) growth is negative for two or more consecutive quarters. In the USA, the National Bureau of Economic Research (NBER) defines it more broadly 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] A sustained recession may become a depression.

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. 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.

Predictors of a recession

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

• Stock market drops have preceded the beginning of recessions. However about half of the drops of 10% or more since 1946 have not resulted in recessions.^[4] Also, approximately half of the stock market decline came after the beginning of recessions.
• Inverted yield curve,^[5] the model developed by Fed economist Jonathan Wright, uses yields on 10-year and three-month Treasury securities as well as the Fed's overnight funds rate. Another model developed by Federal Reserve Bank of New York economists uses only the 10-year/three-month spread. It is, however, not a definite indicator;^[6] it is sometimes followed by a recession 6 to 18 months later.
• The three-month change in the unemployment rate and initial jobless claims.^[7]
• Index of Leading (Economic) Indicators (includes some of the above indicators).^[8]

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. laissez-faire economists may simply recommend the government remain "hands off" and not interfere with natural market forces.

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." ^[9]

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 fact, the Federal Reserve's lowering has even predated recent recessions^[10]. The charts below show the impact on the S&P500 and short and long term interest rates.

• July 13, 1990-September 4, 1992: 8.00% to 3.00% (Includes 1990-1991 recession) ^{[11] [12]}
• February 1, 1995-November 17, 1998: 6.00 - 4.75 ^{[13] [14] [15]}
• May 16, 2000-June 25, 2003: 6.50- 1.00 (Includes 2001 recession) ^{[16] [17] [18]}
• June 29, 2006- (Mar. 18 2008): 5.25-2.25 ^[19]

Siegel^[20] 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.

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 and excess debt accumulation by consumers.

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 5.7 months). It should be noted that ten stock market declines of greater than 10% in the DJIA were not followed by a recession^[21].

The real-estate market also usually weakens before a recession^[22]. 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^[23].

During an economic decline, high yield stocks such as financial services, pharmaceuticals, and tobacco tend to hold up better^[24]. However when the economy starts to recover and the bottom of the market has passed (sometimes identified on charts as a MACD ^[25]), growth stocks tend to recover faster. There is significant disagreement about how health care and utilities tend to recover^[26]. 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.^[27].

History of recessions in the United States

According to economists,^[28] 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. However, since 1980 there have been only eight periods of negative economic growth over one fiscal quarter or more^[29], and three periods considered recessions:

• January-July 1980 and July 1981-November 1982: 2 years total
• July 1990-March 1991: 8 months
• November 2001-November 2002: 12 months

From 1991 to 2000, the U.S. experienced 37 quarters of economic expansion, the longest period of expansion on record.^[29]

For the past three 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.^[29]

Global recessions

There is no commonly accepted definition of a global recession.^[30] 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.^[31] International Monetary Fund has recently lowered its 2008 global growth projection from 4.9 percent to 4.1 percent (as measured in terms of purchasing power parity).^[32]

There is significant speculation about a possible U.S.A. recession in 2008. If it happens, it is expected to have a global impact.^[33][34][35] U.S. represents about 21 percent of the global economy. Impact of a U.S. recession can spread though the following:^[36]

• Less spending by American consumers and companies reduces demand for imports.
• The crisis of the U.S. subprime-mortgage market has pushed up credit costs worldwide and forced European and Asian banks to write down billions of dollars in holdings.
• Dropping U.S. stock prices drag down markets elsewhere.

2008 recession in some countries

Since 2007, there had been speculation of a possible recession starting in late 2007 or early 2008 in some countries. These speculations have turned out to be true.

United States

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.

While some economists were confident about a recession^[37], others were not as easily convinced.^[38] While some believed that the current slowdown would at best be a mild and brief recession,^[39] there was always an anticipation that the economy may start recovering in the later part of 2008.^[40]

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. may fall into a recession. The economists surveyed by Bloomberg News this month predicted the GDP growth will slow to 0.1 percent in January to March.

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 a recession is unlikely if US economy gets through the next two months without contracting^[41].

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. ^[42]

The US Economy grew in the first quarter by 1%, ^{[43] [44]} meaning that the US does not meet the widely accepted definition of a recession.

Other countries

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 and the eurozone.

Recession and politics

Generally an administration gets credit or blame for the state of economy during its time.^[45] This has caused disagreements about when a recession actually started.^[46] 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.^[47] The resulting taming of inflation, did, however, set the stage for a robust growth period during Reagan's administration.

See also

• List of recessions in the United States - A list of important recessions in the United States
• Great Depression - August 1929 to March 1933: longest recession of the 20th century
• Age wave theory - Consequence of baby boomers retiring.
• Oil crisis - Global oil crises

Causes of recessions

• Speculation
• Currency crises
• Inflation
• National debt
• War

Effects of recessions

• Unemployment
• Foreclosures
• Bankruptcies
• Stock market crash
• Reduced sales
• Banks lend less money
• Deflation

References

Further reading

• The Thirty-Five Most Tumultuous Years in Monetary History: Shocks and Financial Trauma, by Robert Aliber. Presented at the IMF
• Encyclopedia Britannica, Depression
• Recession? Depression? What's the difference? (About.com)

External links

• Business Cycle Expansions and Contractions, the National Bureau Of Economic Research
• Independent Analysis of Business Cycle Conditions - American Institute for Economic Research (AIER)
• Recession Library - US Economic Recession History News and Videos
• Information on the Credit Crunch available at www.edsearners.co.uk

bs:Recesija bg:??????? ca:Recessió cs:Recese da:Recession de:Rezession es:Recesión eo:Recesio fr:Récession économique gl:Recesión hr:Recesija id:Resesi it:Recessione he:????? la:Recessio oeconomica lt:Recesija nl:Recessie ja:???? no:Resesjon nn:Resesjon pl:Recesja (ekonomia) pt:Recessão ru:???????? sk:Recesia (ekonómia) fi:Taantuma vi:Suy thoái kinh t? tr:Resesyon yi:??????? zh:????