Recession

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This article is about a general slowdown in economic activity. For other uses, see
Recession (disambiguation).

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In economics, a recession is a business cycle contraction, a general slowdown in
economic activity over a period of time.[1][2] During recessions, many macroeconomic
indicators vary in a similar way. Production as measured by Gross Domestic Product
(GDP), employment, investment spending, capacity utilization, household incomes,
business profits and inflation all fall during recessions; while bankruptcies and the
unemployment rate rise.

Recessions are generally believed to be caused by a widespread drop in spending.

Governments usually respond to recessions by adopting expansionary macroeconomic
policies, such as increasing money supply, increasing government spending and
decreasing taxation.

Contents
[hide]

• 1 Identifying
• 2 Attributes
• 3 Predictors of a recession
• 4 Government responses
• 5 Stock market and recessions
• 6 Recession and politics
• 7 Impact of recessions
o 7.1 Unemployment
o 7.2 Business
o 7.3 Social effects
• 8 History of recessions
o 8.1 Global recessions
o 8.2 United Kingdom recessions
o 8.3 United States recessions
o 8.4 Late 2000s recession
 8.4.1 United States
 8.4.2 Other countries
• 9 See also
o 9.1 Causes of recessions
o 9.2 Effects of recessions
• 10 References

• 11 External links

[edit] Identifying
In a 1975 New York Times article, economic statistician Julius Shiskin suggested
several rules of thumb for identifying a recession, one of which was "two down
quarters of GDP".[3] In time, the other rules of thumb were forgotten,[4] and a recession
is now often defined simply as a period when GDP falls (negative real economic
growth) for at least two quarters.[5][6] Some economists prefer a definition of a 1.5%
rise in unemployment within 12 months.[7]
In the United States the Business Cycle Dating Committee of the National Bureau of
Economic Research (NBER) is generally seen as the authority for dating US
recessions. The NBER defines an economic recession as: "a significant decline in
[the] 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."[8] Almost universally,
academics, economists, policy makers, and businesses defer to the determination by
the NBER for the precise dating of a recession's onset and end.

[edit] Attributes
Please help improve this article by expanding it. Further information
might be found on the talk page. (March 2009)

A recession has many attributes that can occur simultaneously and includes 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.[7] As an informal shorthand, economists sometimes refer to different
recession shapes, such as V-shaped, U-shaped, L-shaped and W-shaped recessions.

In the US, V-shaped, or short-and-sharp contractions followed by rapid and sustained

recovery, occurred in 1954 and 1990-91; U-shaped (prolonged slump) in 1974-75,
and W-shaped, or double-dip recessions in 1949 and 1980-82. Japan’s 1993-94
recession was U-shaped and its 8-out-of-9 quarters of contraction in 1997-99 can be
described as L-shaped. Korea, Hong Kong and South-east Asia experienced U-shaped
recessions in 1997-98, although Thailand’s eight consecutive quarters of decline
should be termed L-shaped.[9]

[edit] Predictors of a recession

Although there are no completely reliable predictors, the following are regarded to be
possible predictors.[10]

• Inverted yield curve,[11] 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.[12] 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;[13]
• The three-month change in the unemployment rate and initial jobless
[14]
claims.
• Index of Leading (Economic) Indicators (includes some of the above
indicators).[15]
• Lowering of Home Prices. Lowering of home prices or value, too
much personal debts.
[edit] Government responses
Please help improve this section by expanding it. Further information
might be found on the talk page. (March 2009)
See also: Stabilization policy

Most mainstream economists believe that recessions are caused by inadequate

aggregate demand in the economy, and favor the use of expansionary macroeconomic
policy during recessions. Strategies favored for moving an economy out of a recession
vary depending on which economic school the policymakers follow. Monetarists
would favor the use of expansionary monetary policy, while Keynesian economists
may advocate increased government spending to spark economic growth. Supply-side
economists may suggest tax cuts to promote business capital investment. Laissez-faire
minded economists may simply recommend that the government not interfere with
natural market forces.

[edit] Stock market and recessions

The examples and perspective in this article deal primarily with the
United States and do not represent a worldwide view of the subject.
Please improve this article and discuss the issue on the talk page. (September
2008)

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), while ten
stock market declines of greater than 10% in the DJIA were not followed by a
recession.[16]

The real-estate market also usually weakens before a recession.[17] However real-estate
declines can last much longer than recessions.[18]

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.[19]

During an economic decline, high yield stocks such as fast moving consumer goods,
pharmaceuticals, and tobacco tend to hold up better.[20] However when the economy
starts to recover and the bottom of the market has passed (sometimes identified on
charts as a MACD[21]), growth stocks tend to recover faster. There is significant
disagreement about how health care and utilities tend to recover.[22] 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.[23]

There is a view termed the halfway rule[24] 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. The
actual US stock market bottom of the 2008 recession was in March 2009.

[edit] Recession and politics

Generally an administration gets credit or blame for the state of economy during its
time.[25] This has caused disagreements about when a recession actually started.[26] 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.[27] The resulting taming of inflation did, however, set the stage for a
robust growth period during Reagan's administration.

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.

[edit] Impact of recessions

[edit] Unemployment

The full impact of a recession on employment may not be felt for several quarters.
Research in Britain shows that low-skilled, low-educated workers and the young are
most vulnerable to unemployment in a downturn. After recessions in Britain in the
1980s and 1990s, it took five years for unemployment to fall back to its original
levels.[28]

[edit] Business

Productivity tends to fall in the early stages of a recession, then rises again as weaker
firms close. The variation in profitability between firms rises sharply. Recessions
have also provided opportunities for anti-competitive mergers, with a negative impact
on the wider economy: the suspension of competition policy in the United States in
the 1930s may have extended the Great Depression.[28]

[edit] Social effects

The living standards of people dependent on wages and salaries are more affected by
recessions than those who rely on fixed incomes or welfare benefits. The loss of a job
is known to have a negative impact on the stability of families, and individuals' health
and well-being.[28]
[edit] History of recessions
[edit] Global recessions

There is no commonly accepted definition of a global recession, although the IMF

regards periods when global growth is less than 3% to be global recessions.[29] 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.[30]

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,
four periods since 1985 qualify: 1990–1993, 1998, 2001–2002 and 2008–2009.

[edit] United Kingdom recessions

Main article: List of recessions in the United Kingdom

The most recent recession to affect the United kingdom was the Late-2000s recession.

[edit] United States recessions

Main article: List of recessions in the United States

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.[8] However, since 1980 there have been only eight periods of
negative economic growth over one fiscal quarter or more,[31] and four periods
considered recessions:

• July 1981-November 1982: 14 months

• July 1990-March 1991: 8 months
• March 2001-November 2001: 8 months
• December 2007-July 2009: 19 months[32][33]

For the past three recessions, the NBER decision has approximately conformed with
the definition involving two consecutive quarters of decline. While the 2001 recession
did not involve two consecutive quarters of decline, it was preceded by two quarters
of alternating decline and weak growth.[31]

[edit] Late 2000s recession

Further information: Late-2000s recession

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,[34] and 2008 saw many
other nations follow suit.

[edit] United States

The United States housing market correction (a possible consequence of United States
housing bubble) and subprime mortgage crisis has significantly contributed to a
recession.

The 2008/2009 recession is seeing private consumption fall for the first time in nearly
20 years. This indicates the depth and severity of the current recession. With
consumer confidence so low, recovery will take a long time. Consumers in the U.S.
have been hard hit by the current recession, with the value of their houses dropping
and their pension savings decimated on the stock market. Not only have consumers
watched their wealth being eroded – they are now fearing for their jobs as
unemployment rises. [35]

U.S. employers shed 63,000 jobs in February 2008,[36] 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."[37] On October 1,
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. In November 2008, employers eliminated 533,000 jobs, the largest
single month loss in 34 years.[38] For 2008, an estimated 2.6 million U.S. jobs were
eliminated.[39]

The unemployment rate of US grew to 8.5 percent in March 2009, and there have
been 5.1 million job losses till March 2009 since the recession began in December
2007.[40] That is about five million more people unemployed compared to just a year
ago.[41] This has become largest annual jump in the number of unemployed persons
since the 1940’s.[42]

Although the US Economy grew in the first quarter by 1%,[43][44] 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.
[45]
The third quarter of 2008 brought on a GDP retraction of 0.5%[46] 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.[47]

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.[48] 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 U.S. 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.[49] By July of 2009 a growing number of
economists believed that the recession may have ended.[50][51] The National Bureau of
Economic Research will not make this official determination for some time. In the
2001 recession, for example, the recession ended in November 2001, but it was not
until July 2003 that the NBER announced its official determination.[52]

[edit] Other countries

 This section does not cite any references or sources.
Please help improve this article by adding citations to reliable sources. Unsourced material
may be challenged and removed. (February 2008)

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 U.S.
slowdown. These include the United Kingdom, Ireland, Canada, Japan, China, India,
New Zealand and many countries within the EEA. 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. India along with
China is experiencing an economic slowdown but not a recession. Also Africa and
South Africa are experiencing economic slowdown and global outbreak. Australia
avoided a technical recession in 2009, and had positive growth against the overall
global economic downturn.

[edit] 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
• Late 2000s recession
• Stagflation

[edit] Causes of recessions

• Crisis theory
• Tendency of the rate of profit to fall
• Currency crisis
• Energy crisis
• War
• Underconsumption
• Overproduction
• Financial crisis

[edit] Effects of recessions

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

[edit] References
1. ^ "Recession". Merriam-Webster Online Dictionary. http://www.merriam-
webster.com/dictionary/recession. Retrieved 19 November 2008.
2. ^ "Recession definition". Encarta World English Dictionary [North
American Edition]. Microsoft Corporation. 2007.
http://encarta.msn.com/encnet/features/dictionary/DictionaryResults.aspx?
refid=1861699686. Retrieved 19 November 2008.
3. ^ Shiskin, Julius (1974-12-01), "The Changing Business Cycle", New York
Times: 222
4. ^ Achuthan, Lakshman; Banerji, Anirvan (2008-05-07). "The risk of
redefining recession". CNN.
http://money.cnn.com/2008/05/05/news/economy/recession/index.htm.
5. ^ "Financial Check Glossary". Bloomberg.com. 2000.
http://www.bloomberg.com/invest//glossary/bfglosr.htm. Retrieved 19 November
2008.
6. ^ "Recession definition". BusinessDictionary.com. 2007–2008.
http://www.businessdictionary.com/definition/recession.html. Retrieved 19
November 2008.
7. ^ a b 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
8. ^ a b "Business Cycle Expansions and Contractions". National Bureau of
Economic Research. http://www.nber.org/cycles.html. Retrieved 19 November 2008.
9. ^ http://www.adb.org/Documents/Books/Key_Indicators/2001/default.asp
10. ^ A Estrella, FS Mishkin. "Predicting U.S. Recessions: Financial Variables
as Leading Indicators". MIT Press.
http://www.mitpressjournals.org/doi/pdfplus/10.1162/003465398557320?
cookieSet=1.
11. ^ Grading Bonds on Inverted Curve By Michael Hudson
12. ^ Wright, Jonathan H., The Yield Curve and Predicting Recessions (March
2006). FEDs Working Paper No. 2006-7.
13. ^ Signal or Noise? Implications of the Term Premium for Recession
Forecasting
14. ^ Labor Model Predicts Lower Recession Odds
15. ^ Leading Economic Indicators Suggest U.S. In Recession January 21, 2008
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. ^ "From the subprime to the terrigenous: Recession begins at home". Land
Values Research Group. June 2, 2009. http://lvrg.org.au/blog/2009/06/from-
subprime-to-terrigenous-recession.html. "A downturn in the property market,
especially in turnover (sales) of properties, is a leading indicator of recession, with a
lead time of up to 9 quarters..."
18. ^ Robert J. Shiller. "Why Home Prices May Keep Falling". New York Times,
June 6, 2009. http://www.nytimes.com/2009/06/07/business/economy/07view.html.
19. ^ Recession Predictions and Investment Decisions by Allan Sloan, December
11, 2007
20. ^ Recession? Where to put your money now. Shawn Tully, February 6 2008
21. ^ crossover
22. ^ Rethinking Recession-Proof Stocks Joshua Lipton 01.28.08
23. ^ Recession Stock Picks Douglas Cohen, January 18, 2008
24. ^ http://online.wsj.com/article/SB122635740974515379.html NOVEMBER
11, 2008 Recession Puts Halfway Rule to the Test, By DAVID GAFFEN
25. ^ Economy puts Republicans at risk 29 January 2008
26. ^ The Bush Recession Prepared by: Democrat staff, Senate Budget
Committee,July 31, 2003
 27. ^ Ready for a Real Downer Monday, Nov. 23, 1981 By GEORGE J.
CHURCH
28. ^ a b c Vaitilingam, Romesh (17 September 2009). "Recession Britain: New
ESRC report on the impact of recession on people's jobs, businesses and daily lives".
Economic and Social Research Council.
http://www.esrc.ac.uk/ESRCInfoCentre/PO/releases/2009/september/recessionbritain.
aspx. Retrieved 22 January 2010.
29. ^ The Recession that Almost Was. Kenneth Rogoff, International Monetary
Fund, Financial Times, April 5, 2002
30. ^ Global Recession Risk Grows as U.S. `Damage' Spreads
31. ^ a b http://www.bea.gov/national/xls/gdpchg.xls
32. ^ It's official: Recession since Dec. '07
33. ^ "BBC News - Business - US economy out of recession". BBC. 29 October
2009. http://news.bbc.co.uk/1/hi/business/8332773.stm. Retrieved 6 February 2010.
34. ^ "Determination of the December 2007 Peak in Economic Activity.". NBER
Business Cycle Dating Committee. 2008-12-11.
http://www.nber.org/cycles/dec2008.pdf. Retrieved 2009-04-26.
35. ^ Economic Crisis: When will it End? IBISWorld Recession Briefing " Dr.
Richard J. Buczynski and Michael Bright, IBISWorld, January 2009
36. ^ [1] Job Loss Predictions
37. ^ Recession unlikely if US economy gets through next two crucial months
38. ^ http://www.nytimes.com/2008/12/06/business/economy/06jobs.html
39. ^ http://www.statesmanjournal.com/article/20090110/NEWS/901100332
40. ^ http://www.wealthalchemist.com/Blog/2009/04/reality-check-job-loss-
2009-control
41. ^ http://www.bls.gov/news.release/empsit.nr0.htm
42. ^
http://money.cnn.com/2009/01/09/news/economy/jobs_december/index.htm
43. ^ Real GDP First-Quarter 2008 Preliminary Estimate :: Brent Meyer ::
Economic Trends :: 06.03.08 :: Federal Reserve Bank of Cleveland
44. ^ Fragile economy improves but not out of woods yet: Financial News -
Yahoo! Finance
45. ^ Why it's worse than you think, 16 June 2008, Newsweek.
46. ^ GROSS DOMESTIC PRODUCT: THIRD QUARTER 2008
47. ^ U.S. Economy Contracts Most Since the 2001 Recession
48. ^ http://www.philadelphiafed.org/research-and-data/real-time-center/survey-
of-professional-forecasters/2008/survq408.cfm?loc=interstitialskip Fourth Quarter
2008 Survey of Professional Forecasters Release Date: November 17, 2008
49. ^ http://www.usatoday.com/money/economy/2008-12-01-recession-nber-
statement_N.htm Text of the NBER's statement on the recession
50. ^ Daniel Gross, The Recession Is... Over?, Newsweek, July 14, 2009.
51. ^ V.I. Keilis-Borok et al., Pattern of Macroeconomic Indicators Preceding the
End of an American Economic Recession. Journal of Pattern Recognition Research,
JPRR Vol.3 (1) 2008.
52. ^ 2003 Business Cycle Dating Committee, July 2003, National Bureau of
Economic Research

[edit] 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)
Retrieved from "http://en.wikipedia.org/wiki/Recession"
Categories: Recessions | Macroeconomics | Market trends | Business cycle | Economic
problems | Terms and concepts of the 2000s United States housing bubble
Hidden categories: Articles to be expanded from March 2009 | All articles to be
expanded | Articles with limited geographic scope | USA-centric | Articles needing
additional references from February 2008 | All articles needing additional references

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