Recession

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Definition: Recession


Quick Summary of Recession


Recessions in economics may be defined as a substantial decrease in economic activities in a particular economy. A recession normally lasts for more than a few months and has a tremendous negative impact on important aspects of the economy like industrial production, real income, employment, and both retail and wholesale trade. A couple of successive negative economic growth in a country’s GDP can be regarded as an indication of recession.

Recession is normally regarded as an unpleasant but usual part of a business cycle. The normal duration of recession ranges from half a year to one and a half year. Rates of interest normally go down when there is a recession. This is done in order to revive the economy through the facilitation of money borrowing processes.

As a rule of thumb, a recession is a fall of a nation’s gross domestic product (GDP) over two or more consecutive quarters. A recession is also referred to as a period of economic decline and reduced economic activity. Factors that may cause a recession to include overproduction, decreased demand, falling consumer and business confidence and major economic imbalances, among others. During a recession, the level of unemployment rises, investments decline, and prosperity lags. Real personal income and spending growth also have a tendency to slow if not decline during a recession. A recession can involve rapidly falling (deflation) or sharply rising prices (inflation). The average recession from 1945 to 2005 lasted about ten months but two went on for a record 16 months. The National Bureau of Economic Research is the official arbiter of what is and what is not a recession. A recession in one country can cause a recession to occur in others, specifically trading nations. A recession can be widespread and affect the entire economy or a recession can be industry-specific.



What is the dictionary definition of Recession?

Dictionary Definition


In economics, a recession is a contraction in the business cycle when there is a general decline in economic activity.

  1. The act or an instance of receding or withdrawing.
  2. A period of reduced economic activity

Also:

  • The ceremonial filing out of clergy and/or choir at the end of a church service.

Period of general economic decline defined usually as a contraction in the GDP for six months (two consecutive quarters) or longer. Typically marked by high unemployment, stagnant wages, and fall in retail sales, a recession generally does not last longer than one year and is much milder than a depression. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). Although recessions are considered a normal part of a capitalist economy, there is no unanimity of economists on its causes.


Full Definition of Recession


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. 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 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. A devastating breakdown of an economy (essentially, a severe depression, or a hyperinflation, depending on the circumstances) is called economic collapse. Newspaper columnist Sidney J. Harris distinguished terms this way: “a recession is when your neighbour loses his job; a depression is when you lose your job.”

Market-oriented economies are characterized by economic driving cycles, but actual recessions (declines in economic activity) do not always result in macroeconomic sub-financial declines in gross domestic product. There is much debate, sometimes ideologically motivated, as to whether government intervention smooths the cycle (see Keynesianism), exaggerates it (see Real business cycle theory), or even creates it (see monetarism).

Predictors Of A Recession

There are no totally reliable predictors. However, these are regarded to be possible predictors.

  • Stock market drop
  • Inverted yield curve – 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 the Federal Reserve Bank of New York economists use 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.

History Of US Recessions

According to the economists, since 1854, USA has encountered 32 cycles of expansions and contractions, on average with 17 months of contraction and 38 months of expansion. However, in recent years, they have been shorter and much less common. Since 1980, there have been only four recessions (see charts to see how stocks did in these periods). The charts show the impact on stock market indices.

  • Jan-July 1980: 6 months
  • July 1981-Nov 1982: 16 months
  • July 1990-March 1991: 8 months
  • March 2001-Nov 2001: 8 months

During March 1991 to March 2001, The United States experienced the longest economic expansion – 120 months.

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, other supply-side economists may suggest tax cuts to promote business capital investment, while even others such as laissez-faire economists may simply recommend the government remain “hands-off” and not interfere with the natural market forces of the economy whatsoever.

Federal Reserve Response

The Federal Reserve has responded to potential slow down by lowering the target Federal funds rate during the recessions and other periods of lower growth. In fact, the federal reserve lowering has recently predated recessions.

  • July 13, 1990-Sept 4, 1992: 8.00% to 3.00% (Includes 1990-1991 recession)
  • Feb 1, 1995-Nov 17, 1998: 6.00 – 4.75
  • May 16, 2000- June 25, 2003: 6.50- 1.00 (Includes 2001 recession)
  • June 29, 2006- (Jan. 30 2008): 5.25-3.00

Stock Market And Recessions

Some of the recessions are anticipated by stock market declines. In Stocks for the Long Run, Siegel mentions that since 1948, the 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.

Real estate market also weakens before a recession, however real-estate declines can last much longer than recessions.

Since the business cycle is very hard to predict, Siegal argues that it is not possible to take advantage of the economic cycles for timing investments. Even NBER takes a few months to determine if a peak or trough has occurred.

During the decline, high yield stocks such as financial services, pharmaceuticals, and tobacco can hold up better when the economy is contracting. However, after the bottom (identifiable as MACD crossovers), when the economy starts to recover, the growth stocks will recover faster. There is significant disagreement about health care and utilities. International stocks may provide some safely through diversification, however, economies that are closely correlated with that of USA may also be affected by a recession in the USA.

Bear Market

A bear market is one where prices of securities are going down. There is a lot of pessimism as far as various entities associated with a bear market are concerned and this implies that prices stay low. Selling of securities is very common in a bear market as investors are expecting to make losses.

Boom

Boom is a period in the economy when economic activities like sales increase at a rapid pace. In the case of share markets, boom takes place when there is a bull market. Busts, on the other hand, are related to bear markets. Since markets have a cyclical nature, booms and busts normally follow each other.

Business Cycle

In economics, the business cycle is defined as inconsistent levels of economic activities that keep repeating themselves for a considerable period of time. Business cycles were once thought to be predictable in nature but are presently regarded as being inconsistent.

Double-dip Recession

Double-dip recession is an economic situation whereby the rate of growth of gross domestic product of an economy comes down after a few quarters where there has been only a negligible amount of growth in the gross domestic product of the same.


Examples of Recession in a sentence


Several major retailers cut back on inventory this Christmas season due to the recession.
Market forecasters have been talking about the probability of a recession for quite some time now.


Synonyms For Recession


regression, decline, throwback, lapse, retrogression

Cite Term


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Definition Sources


Definitions for Recession are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 25th April, 2020 | 5 Views.