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A recession implies at least two quarters of negative economic activity. <ref>Money magazine</ref> It is a increase in an economy's unemployment; output and profits fall; personal income falls.

Broader definitions of an economic recession are often used. Investopedia defines an economic recession: “A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.”<ref>Recession</ref>

There may also be a decline in personal and business optimism, and a decline in the rate of consumption and capital investment in business activity.

Recessions are defined using a number of advanced indicators by the National Bureau of Economic Research, a private think tank that includes both conservative and liberal economists.<ref> See US Business Cycle Expansions and Contractions</ref>

As a rough rule of thumb, a recession is underway when there is a decline in gross domestic product (GDP) for two consecutive quarters.


Several strategies exist for dealing with recession:

See also



Economics Liberal Threats Man-made Disaster

Snippet from Wikipedia: Recession

In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or a large-scale natural or anthropogenic disaster (e.g. a pandemic). In the United States, it is defined as "a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales". In the United Kingdom, it is defined as a negative economic growth for two consecutive quarters.

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

To put simply, a recession is the decline of economic activity, which means that the public have stopped buying products for a while which can cause the downfall of the GDP after a expansion of the economy (A time where products become popular and the income profit of a business becomes large. This causes inflation (The rise of product prices). In a recession, the rate of inflation slows down, stops or decreases.

In economics, a recession is a business cycle contraction. It is a general slowdown in economic activity.<ref>


</ref> Macroeconomic indicators such as GDP(Gross Domestic Product), investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.


In a 1975 New York Times article, economic statistician Julius Shiskin suggested several rules of thumb for defining a recession, one of which was two down consecutive quarters of GDP.<ref>

</ref> In time, the other rules of thumb were forgotten. Some economists prefer a definition of a 1.5% rise in unemployment within 12 months.<ref name=“Eslake”/>

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 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.”<ref name=“”>

</ref> 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.

In the United Kingdom, recessions are generally defined as two consecutive quarters of negative economic growth, as measured by the seasonal adjusted quarter-on-quarter figures for real GDP.<ref>


</ref> The exact same recession definition apply for all member states of the European Union.


A recession has many attributes that can occur simultaneously and includes declines in component measures of economic activity (GDP) such as consumption, investment, government spending, and net export activity. These summary measures reflect underlying drivers such as employment levels and skills, household savings rates, corporate investment decisions, interest rates, demographics, and government policies.

Economist Richard C. Koo wrote that under ideal conditions, a country's economy should have the household sector as net savers and the corporate sector as net borrowers, with the government budget nearly balanced and net exports near zero.<ref name=“Koo 2009”>

</ref><ref name=“Koo 2011”>

</ref> When these relationships become imbalanced, recession can develop within the country or create pressure for recession in another country. Policy responses are often designed to drive the economy back towards this ideal state of balance.

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.<ref name=“Eslake”>"What is the difference between a recession and a depression?" Saul Eslake Nov 2008</ref> As an informal shorthand, economists sometimes refer to different recession shapes, such as V-shaped, U-shaped, L-shaped and W-shaped recessions.

Type of recession or shape

The type and shape of recessions are distinctive. 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.<ref>


Psychological aspects

Recessions have psychological and confidence aspects. For example, if companies expect economic activity to slow, they may reduce employment levels and save money rather than invest. Such expectations can create a self-reinforcing downward cycle, bringing about or worsening a recession.<ref>

</ref> Consumer confidence is one measure used to evaluate economic sentiment.<ref>

</ref> The term animal spirits has been used to describe the psychological factors underlying economic activity. Economist Robert J. Shiller wrote that the term “…refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people.”<ref>


Balance sheet recession

The bursting of a real estate or financial asset price bubble can cause a recession. For example, economist Richard Koo wrote that Japan's “Great Recession” that began in 1990 was a “balance sheet recession.” It was triggered by a collapse in land and stock prices, which caused Japanese firms to have negative equity, meaning their assets were worth less than their liabilities. Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy.<ref name=“Koo 2009”/><ref name=“Koo 2011”/><ref>

</ref><ref>Richard Koo – The World In Balance Sheet Recession – Real World Economics Review – December 2011</ref>

Paul Krugman discussed the balance sheet recession concept during 2010, agreeing with Koo's situation assessment and view that sustained deficit spending when faced with a balance sheet recession would be appropriate. However, Krugman argued that monetary policy could also affect savings behavior, as inflation or credible promises of future inflation (generating negative real interest rates) would encourage less savings. In other words, people would tend to spend more rather than save if they believe inflation is on the horizon. In more technical terms, Krugman argues that the private sector savings curve is elastic even during a balance sheet recession (responsive to changes in real interest rates) disagreeing with Koo's view that it is inelastic (non-responsive to changes in real interest rates).<ref>NYT – Paul Krugman – Notes on Koo – August 2010</ref><ref>VOX – Paul Krugman – Debt, Deleveraging and the Liquidity Trap – November 18, 2010</ref>

A July 2012 survey of balance sheet recession research reported that consumer demand and employment are affected by household leverage levels. Both durable and non-durable goods consumption declined as households moved from low to high leverage with the decline in property values experienced during the subprime mortgage crisis. Further, reduced consumption due to higher household leverage can account for a significant decline in employment levels. Policies that help reduce mortgage debt or household leverage could therefore have stimulative effects.<ref>NYT – Paul Krugman – Grim Natural Experiments – July 6, 2012</ref><ref>How Mortgage Debt is Holding Back the Economy – Mike Konczal – Roosevelt Institute – July 3, 2012</ref>

Liquidity trap

A liquidity trap is a Keynesian theory that a situation can develop in which interest rates reach near zero (zero interest-rate policy) yet do not effectively stimulate the economy. In theory, near-zero interest rates should encourage firms and consumers to borrow and spend. However, if too many individuals or corporations focus on saving or paying down debt rather than spending, lower interest rates have less effect on investment and consumption behavior; the lower interest rates are like “pushing on a string.” Economist Paul Krugman described the U.S. 2009 recession and Japan's lost decade as liquidity traps. One remedy to a liquidity trap is expanding the money supply via quantitative easing or other techniques in which money is effectively printed to purchase assets, thereby creating inflationary expectations that cause savers to begin spending again. Government stimulus spending and mercantilist policies to stimulate exports and reduce imports are other techniques to stimulate demand.<ref name=“Krugman 2009”>

</ref> He estimated in March 2010 that developed countries representing 70% of the world's GDP were caught in a liquidity trap.<ref>


Paradoxes of thrift and deleveraging

Behavior that may be optimal for an individual (e.g., saving more during adverse economic conditions) can be detrimental if too many individuals pursue the same behavior, as ultimately one person's consumption is another person's income. Too many consumers attempting to save (or pay down debt) simultaneously is called the paradox of thrift and can cause or deepen a recession. Economist Hyman Minsky also described a “paradox of deleveraging” as financial institutions that have too much leverage (debt relative to equity) cannot all de-leverage simultaneously without significant declines in the value of their assets.<ref name=“Yellen on Minsky”>Federal Reserve – Janet Yellen – A Minsky Meltdown – April 2009</ref>

During April 2009, U.S. Federal Reserve Vice Chair Janet Yellen discussed these paradoxes: “Once this massive credit crunch hit, it didn’t take long before we were in a recession. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year. A process of balance sheet deleveraging has spread to nearly every corner of the economy. Consumers are pulling back on purchases, especially on durable goods, to build their savings. Businesses are cancelling planned investments and laying off workers to preserve cash. And, financial institutions are shrinking assets to bolster capital and improve their chances of weathering the current storm. Once again, Minsky understood this dynamic. He spoke of the paradox of deleveraging, in which precautions that may be smart for individuals and firms—and indeed essential to return the economy to a normal state—nevertheless magnify the distress of the economy as a whole.”<ref name=“Yellen on Minsky” />


There are no known completely reliable predictors, but the following are considered possible predictors.<ref>


Government responses

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. When interest rates reach the boundary of an interest rate of zero percent (zero interest-rate policy) conventional monetary policy can no longer be used and government must use other measures to stimulate recovery. Keynesians argue that fiscal policy—tax cuts or increased government spending—works when monetary policy fails. Spending is more effective because of its larger multiplier but tax cuts take effect faster.

For example, Paul Krugman wrote in December 2010 that significant, sustained government spending was necessary because indebted households were paying down debts and unable to carry the U.S. economy as they had previously: “The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble…highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years. This would be fine if someone else were taking up the slack. But what’s actually happening is that some people are spending much less while nobody is spending more — and this translates into a depressed economy and high unemployment. What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained…”<ref>NYT – Paul Krugman – Block those Economic Metaphors – December 2010</ref>

Stock market

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 Dow Jones Industrial Average were not followed by a recession.<ref>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 978-0-07-137048-6</ref>

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

</ref> However real-estate declines can last much longer than recessions.<ref>


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.<ref>Recession Predictions and Investment Decisions by Allan Sloan, 11 December 2007</ref>

During an economic decline, high yield stocks such as fast moving consumer goods, pharmaceuticals, and tobacco tend to hold up better.<ref>Recession? Where to put your money now. Shawn Tully, 6 February 2008</ref> However when the economy starts to recover and the bottom of the market has passed (sometimes identified on charts as a MACD<ref>

</ref>), growth stocks tend to recover faster. There is significant disagreement about how health care and utilities tend to recover.<ref>Rethinking Recession-Proof Stocks Joshua Lipton 28 January 2008</ref> 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.<ref>Recession Stock Picks Douglas Cohen, 18 January 2008</ref>

There is a view termed the halfway rule<ref>

</ref> 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.


Generally an administration gets credit or blame for the state of economy during its time.<ref>Economy puts Republicans at risk 29 January 2008</ref> This has caused disagreements about when a recession actually started.<ref>The Bush Recession Prepared by: Democrat staff, Senate Budget Committee, 31 July 2003</ref> 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.<ref>Ready for a Real Downer Monday, 23 November 1981 By GEORGE J. CHURCH</ref> 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.



Unemployment is particularly high during a recession. Many economists working within the neoclassical paradigm argue that there is a natural rate of unemployment which, when subtracted from the actual rate of unemployment, can be used to calculate the negative GDP gap during a recession. In other words, unemployment never reaches 0 percent, and thus is not a negative indicator of the health of an economy unless above the “natural rate,” in which case it corresponds directly to a loss in gross domestic product, or GDP.<ref>The Saylor Foundation. “Unemployment Rate.” pp. 1 :// Accessed 20 June 2012</ref>

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<ref>Market Oracle John Mauldin Feb 2009 “US in Recession Rising Unemployment ” ://</ref> 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.<ref name=“ESRC”>

</ref> Many companies often expect employment discrimination claims to rise during a recession.<ref>



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.<ref name=“ESRC”/>

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.<ref name=“ESRC”/>



According to the International Monetary Fund (IMF), “Global recessions seem to occur over a cycle lasting between eight and 10 years.”<ref name=“IMF2002 recession statement”>The Recession that Almost Was. Kenneth Rogoff, International Monetary Fund, Financial Times, 5 April 2002</ref> The IMF takes many factors into account when defining a global recession. Until April 2009, IMF several times communicated to the press, that a global annual real GDP growth of 3.0 percent or less in their view was ”…equivalent to a global recession.“<ref name=“economist-12381879”>

</ref><ref> Lall, Subir. “IMF Predicts Slower World Growth Amid Serious Market Crisis,” International Monetary Fund, April 9, 2008. ://</ref> By this measure, six periods since 1970 qualify: 1974–1975,<ref name=“IMF0901”> IMF Jan 2009 update</ref> 1980–1983,<ref name=“IMF0901”/> 1990–1993,<ref name=“IMF0901”/><ref name=“b1”>

</ref> 1998,<ref name=“IMF0901”/><ref name=“b1”/> 2001–2002,<ref name=“IMF0901”/><ref name=“b1”/> and 2008–2009.<ref name=“IMF1301”>

</ref> During what IMF in April 2002 termed the past three global recessions of the last three decades, global per capita output growth was zero or negative, and IMF argued—at that time—that because of the opposite being found for 2001, the economic state in this year by itself did not qualify as a global recession.<ref name=“IMF2002 recession statement”/>

In April 2009, IMF changed their Global recession definition to:

  • A decline in annual per

    capita real World GDP (purchasing power parity weighted), backed up by a decline or worsening for one or more of the seven other global macroeconomic indicators: Industrial production, trade, capital flows, oil consumption, unemployment rate, per

    capita investment, and per

    capita consumption.<ref name=“New IMF Global Recession definition”>

    </ref><ref name=“IMF WEO 2009”>


By this new definition, a total of four global recessions took place since World War II: 1975, 1982, 1991 and 2009. All of them only lasted one year, although the third would have lasted three years (1991

93) if IMF as criteria had used the normal exchange rate weighted per

capita real World GDP rather than the purchase power parity weighted per

capita real World GDP.<ref name=“New IMF Global Recession definition”/><ref name=“IMF WEO 2009”/>

United Kingdom

The most recent recession to affect the United Kingdom was the late-2000s recession.

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.<ref name=“” /> However, since 1980 there have been only eight periods of negative economic growth over one fiscal quarter or more,<ref name=“autogenerated1”></ref> and four periods considered recessions:

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.<ref name=“autogenerated1” />

Late 2000s

Official economic data shows that a substantial number of nations were in recession as of early 2009. The US entered a recession at the end of 2007,<ref name=“nber”>

</ref> and 2008 saw many other nations follow suit. The US recession of 2007 ended in June 2009<ref>

</ref> as the nation entered the current economic recovery.

United States

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

The 2007–2009 recession saw 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 takes 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.<ref>Economic Crisis: When will it End? IBISWorld Recession Briefing " Dr. Richard J. Buczynski and Michael Bright, IBISWorld, January 2009</ref>

U.S. employers shed 63,000 jobs in February 2008,<ref>://

Job Loss Predictions</ref> the most in five years. Former Federal Reserve chairman Alan Greenspan said on 6 April 2008 that “There is more than a 50 percent chance the United States could go into recession.”<ref>Recession unlikely if US economy gets through next two crucial months

</ref> On 1 October, the Bureau of Economic Analysis reported that an additional 156,000 jobs had been lost in September. On 29 April 2008, Moody'sMoody's declared that nine US states were in a recession. In November 2008, employers eliminated 533,000 jobs, the largest single month loss in 34 years.<ref>

</ref> For 2008, an estimated 2.6 million U.S. jobs were eliminated.<ref>


The unemployment rate in the US grew to 8.5 percent in March 2009, and there were 5.1 million job losses until March 2009 since the recession began in December 2007.<ref>

</ref> That was about five million more people unemployed compared to just a year prior,<ref>

</ref> which was the largest annual jump in the number of unemployed persons since the 1940s.<ref>


Although the US Economy grew in the first quarter by 1%,<ref>

</ref><ref>Fragile economy improves but not out of woods yet: Financial News – Yahoo! Finance

</ref> 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.<ref>Why it's worse than you think, 16 June 2008, Newsweek.</ref> The third quarter of 2008 brought on a GDP retraction of 0.5%<ref>

</ref> 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.<ref>


A 17 November 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 would last 14 months.<ref>

</ref> 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 1 December 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.<ref>

</ref> By July 2009 a growing number of economists believed that the recession may have ended.<ref>Daniel Gross, The Recession Is... Over?, Newsweek, 14 July 2009.</ref><ref>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.</ref> The National Bureau of Economic Research announced on 20 September 2010 that the 2008/2009 recession ended in June 2009, making it the longest recession since World War II.<ref>Business Cycle Dating Committee, National Bureau of Economic Research<!-- Bot generated title --></ref>

Other countries

Many other countries, particularly in Europe, have undergone decreasing rates of GDP growth. Some countries have been able to avoid a recession but have still experienced slower economic activity, such as China. India and Australia were able to maintain positive growth throughout the late-2000s recession.

See also


recession.txt · Last modified: 2020/03/12 18:37 (external edit)