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In economics, the term recession generally describes the reduction of a country's gross domestic product (GDP) for at least two quarters. The usual dictionary definition is "a period of reduced economic activity", a business cycle contraction.

The United States-based National Bureau of Economic Research (NBER) defines economic recession as: "a significant decline in economic activity spread across the country, 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." The NBER's Business Cycle Dating Committee is generally seen as the authority for dating US recessions. Academic economists, policy makers, and businesses all usually refer to recessions as determined by the NBER.

Attributes of recessions

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. Some economists prefer a more robust definition of a 1.5% rise in unemployment within 12 months.

In a 1974 New York Times article, Julius Shiskin suggested several rules of thumb to identify a recession, which included two successive quarterly declines in gross domestic product (GDP). His other rules are usually ignored.

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. 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 (GDP down by 10%) or prolonged (three or four years) recession is referred to as an economic depression, although some argue that their causes and cures can be different.

Predictors of a recession

There are no completely reliable predictors. These are regarded to be possible predictors.

• In the U.S. a significant stock market drop has often preceded the beginning of a recession. However about half of the declines of 10% or more since 1946 have not been followed by recessions. In about 50% of the cases a significant stock market decline came only after the recessions had already begun.
• Inverted yield curve, the model developed by economist Jonathan H. 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; it is sometimes followed by a recession 6 to 18 months later.
• The three-month change in the unemployment rate and initial jobless claims.
• Index of Leading (Economic) Indicators (includes some of the above indicators).

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 that the government 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."

Stock market and recessions

Template:Globalize/USA 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.

The real-estate market also usually weakens before a recession. 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.

During an economic decline, high yield stocks such as fast moving consumer goods, pharmaceuticals, and tobacco tend to hold up better. However when the economy starts to recover and the bottom of the market has passed (sometimes identified on charts as a MACD ), growth stocks tend to recover faster. There is significant disagreement about how health care and utilities tend to recover. Diversifying one's portfolio into international stocks may provide some safety; however, economies that are closely correlated with that of the U.S. may also be affected by a recession in the U.S..

There is a view termed the halfway rule 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 followed the average, the downturn in the stock market would have bottomed around November 2008.

Recession and politics

Generally an administration gets credit or blame for the state of economy during its time. This has caused disagreements about when a recession actually started. 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. 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.

History of recessions

Global recessions

There is no commonly accepted definition of a global recession, IMF regards periods when global growth is less than 3% to be global recessions. 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 (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.

United Kingdom recessions

United States recessions

According to economists, since 1854, the U.S. 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, and four periods considered recessions:

• January-July 1980 and July 1981-November 1982: 2 years total
• July 1990-March 1991: 8 months
• March 2001-November 2001: 8 months
• December 2007-current: over 13 months by the end of 2009

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

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.

Current recession in some countries

Official economic data shows that a substantial number of nations are in recession as of early 2009. The US entered a recession at the end of 2007, and 2008 saw many other nations follow suit.

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See also

• Economic depression
• Economic stagnation
• Great Depression - August 1929 to September 1939: longest (and deepest) recession of the 20th century
• List of recessions in the United States - A list of important recessions in the United States
• Stagflation

Causes of recessions

• Currency crises
• Energy crisis
• Underconsumption
• Overproduction
• Financial crisis

Effects of recessions

• Bankruptcies
• Credit crunches
• Deflation (or disinflation)
• Foreclosures
• Unemployment

References

1. "Financial Check epaper.timesofindia.com for more informationGlossary". Bloomberg.com. 2000. Retrieved 19 November 2008.
2. "Recession definition". BusinessDictionary.com. 2007–2008. Retrieved 19 November 2008.{{cite web}}: CS1 maint: date format (link)
3. "Recession". Merriam-Webster Online Dictionary. Retrieved 19 November 2008.
4. "Recession definition". Encarta® World English Dictionary . Microsoft Corporation. 2007. Retrieved 19 November 2008.
5. "Business Cycle Expansions and Contractions". National Bureau of Economic Research. Retrieved 19 November 2008.
6. ^ http://clubtroppo.com.au/2008/11/23/what-is-the-difference-between-a-recession-and-a-depression/ "What is the difference between a recession and a depression?" Saul Eslake Nov 2008
7. The risk of redefining recession, Lakshman Achuthan and Anirvan Banerji, Economic Cycle Research Institute, May 7, 2008
8. A Estrella, FS Mishkin. "Predicting U.S. Recessions: Financial Variables as Leading Indicators". MIT Press. {{cite web}}: Unknown parameter |publishdate= ignored (help)
9. Jeremy Siegel, Stocks for the Long Run
10. Grading Bonds on Inverted Curve By Michael Hudson
11. Wright, Jonathan H., The Yield Curve and Predicting Recessions (March 2006). FEDs Working Paper No. 2006-7.
12. Signal or Noise? Implications of the Term Premium for Recession Forecasting
13. Labor Model Predicts Lower Recession Odds
14. Leading Economic Indicators Suggest U.S. In Recession January 21, 2008
15. If you are fearing a recession, don't panic! Or panic first! - Philadelphia Business Journal:
16. Siegel, Jeremy J. (2002). Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, 3rd, New York: McGraw-Hill, 388. ISBN 9780071370486
17. Housing Has A Strong Correlation To Stocks Chris Ciovacco, September 19, 2006
18. Recession Predictions and Investment Decisions by Allan Sloan, December 11, 2007
19. Recession? Where to put your money now. Shawn Tully, February 6 2008
20. crossover
21. Rethinking Recession-Proof Stocks Joshua Lipton 01.28.08
22. Recession Stock PicksDouglas Cohen, January 18, 2008
23. http://online.wsj.com/article/SB122635740974515379.html NOVEMBER 11, 2008 Recession Puts Halfway Rule to the Test, By DAVID GAFFEN
24. Economy puts Republicans at risk 29 January 2008
25. The Bush Recession Prepared by: Democrat staff, Senate Budget Committee,July 31, 2003
26. Ready for a Real Downer Monday, Nov. 23, 1981 By GEORGE J. CHURCH
27. The Recession that Almost Was. Kenneth Rogoff, International Monetary Fund, Financial Times, April 5, 2002
28. Global Recession Risk Grows as U.S. `Damage' Spreads
29. Business Cycle Expansions and Contractions
30. ^ http://www.bea.gov/national/xls/gdpchg.xls
31. It's official: Recession since Dec. '07
32. NBER Business Cycle Dating Comittee. "Determination of the December 2007 Peak in Economic Activity." 11 December, 2008.

External links

• Recession? Depression? What's the difference? About.com
• Business Cycle Expansions and Contractions The National Bureau Of Economic Research
• Independent Analysis of Business Cycle Conditions - American Institute for Economic Research (AIER)
• RECESSION.ORG - Economic Recession Information & U.S. Recession History

• Recessions
• Macroeconomics
• Market trends
• Business cycle
• Economic problems
• Terms and concepts of the 2000s United States housing bubble