In
economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...
, a recession is a
business cycle
Business cycles are intervals of expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are measured by examin ...
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
In economics, a demand shock is a sudden event that increases or decreases demand for goods or services temporarily.
A positive demand shock increases aggregate demand (AD) and a negative demand shock decreases aggregate demand. Prices of goods ...
). This may be triggered by various events, such as a
financial crisis
A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
, an external trade shock, an adverse
supply shock
A supply shock is an event that suddenly increases or decreases the supply of a commodity or service, or of commodities and services in general. This sudden change affects the equilibrium price of the good or service or the economy's general pr ...
, the bursting of an
economic bubble, or a large-scale
anthropogenic or
natural disaster (e.g. a
pandemic).
In the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, a recession is defined as "a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real
GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
, real income, employment, industrial production, and wholesale-retail sales." The
European Union
The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been de ...
has adopted a similar definition.
In the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
, a recession is defined as negative economic growth for two consecutive quarters.
Governments usually respond to recessions by adopting expansionary
macroeconomic policies
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
, such as
increasing money supply and decreasing interest rates or
increasing government spending and decreasing taxation.
Definitions
In a 1974 article by ''
The New York Times
''The New York Times'' (''the Times'', ''NYT'', or the Gray Lady) is a daily newspaper based in New York City with a worldwide readership reported in 2020 to comprise a declining 840,000 paid print subscribers, and a growing 6 million paid ...
'', Commissioner of the
Bureau of Labor Statistics Julius Shiskin suggested that a rough translation of the bureau's qualitative definition of a recession into a quantitative one that almost anyone can use might run like this:
* In terms of duration – Declines in real
gross national product
The gross national income (GNI), previously known as gross national product (GNP), is the total domestic and foreign output claimed by residents of a country, consisting of gross domestic product (GDP), plus factor incomes earned by foreign ...
(GNP) for two consecutive quarters; a decline in industrial production over a six-month period.
* In terms of depth – A 1.5% decline in real GNP; a 15% decline in non-agricultural employment; a two-point rise in unemployment to a level of at least 6%.
* In terms of diffusion – A decline in non-agricultural employment in more than 75% of industries, as measured over six-month spans, for six months or longer.
Over the years, some commentators dropped most of Shiskin's "recession-spotting" criteria for the simplistic rule-of-thumb of a decline in real GNP for two consecutive quarters.
In the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, the Business Cycle Dating Committee of the
National Bureau of Economic Research
The National Bureau of Economic Research (NBER) is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic c ...
(NBER) is generally seen as the authority for dating US recessions. The NBER, a private economic research organization, 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 gross domestic product (real GDP) is a macroeconomic measure of the value of economic output adjusted for price changes (i.e. inflation or deflation). This adjustment transforms the money-value measure, nominal GDP, into an index for quantit ...
,
real income, employment,
industrial production, and
wholesale
Wholesaling or distributing is the sale of goods or merchandise to retailers; to industrial, commercial, institutional or other professional business users; or to other wholesalers (wholesale businesses) and related subordinated services. In ...
-
retail sales".
The NBER is considered the official arbiter of recession start and end dates for the United States. The
Bureau of Economic Analysis, an independent federal agency that provides official macroeconomic and industry statistics,
says "the often-cited identification of a recession with two consecutive quarters of negative GDP growth is not an official designation" and that instead, "The designation of a recession is the province of a committee of experts at the National Bureau of Economic Research".
The
European Union
The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been de ...
adopted a definition similar to that of the NBER, using GDP alongside additional macroeconomic variables such as employment and other measures to assess the depth of decline in economic activity.
Recessions in the United Kingdom are generally defined as two consecutive quarters of negative economic growth, as measured by the seasonal adjusted quarter-on-quarter figures for
real GDP
Real gross domestic product (real GDP) is a macroeconomic measure of the value of economic output adjusted for price changes (i.e. inflation or deflation). This adjustment transforms the money-value measure, nominal GDP, into an index for quantit ...
.
The
Organisation for Economic Co-operation and Development (OECD) defines a recession as a period of at least two years during which the cumulative
output gap reaches at least 2% of GDP, and the output gap is at least 1% for at least one year.
Attributes
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
In economics, the business sector or corporate sector - sometimes popularly called simply "business" - is "the part of the economy made up by companies". It is a subset of the domestic economy, excluding the economic activities of general gover ...
as net borrowers, with the government budget nearly balanced and
net exports
The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balance ...
near zero.
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.
["What is the difference between a recession and a depression?"](_blank)
Saul Eslake Nov 2008 As an informal shorthand, economists sometimes refer to different
recession shapes
Recession shapes or recovery shapes are used by economists to describe different types of recessions and their subsequent recoveries. There is no specific academic theory or classification system for recession shapes; rather the terminology is us ...
, such as
V-shaped,
U-shaped
Many shapes have metaphorical names, i.e., their names are metaphors: these shapes are named after a most common object that has it. For example, "U-shape" is a shape that resembles the letter U, a bell-shaped curve has the shape of the vertical ...
,
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 1990–1991; U-shaped (prolonged slump) in 1974–1975, and W-shaped, or
double-dip recession
Recession shapes or recovery shapes are used by economists to describe different types of recessions and their subsequent recoveries. There is no specific academic theory or classification system for recession shapes; rather the terminology is us ...
s in 1949 and 1980–1982. Japan's 1993–1994 recession was U-shaped and its 8-out-of-9 quarters of contraction in 1997–1999 can be described as L-shaped.
Korea
Korea ( ko, 한국, or , ) is a peninsular region in East Asia. Since 1945, it has been divided at or near the 38th parallel, with North Korea (Democratic People's Republic of Korea) comprising its northern half and South Korea (Republic o ...
,
Hong Kong
Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China (abbr. Hong Kong SAR or HKSAR), is a city and special administrative region of China on the eastern Pearl River Delta i ...
and South-east Asia experienced U-shaped recessions in 1997–1998, although
Thailand
Thailand ( ), historically known as Siam () and officially the Kingdom of Thailand, is a country in Southeast Asia, located at the centre of the Indochinese Peninsula, spanning , with a population of almost 70 million. The country is b ...
's eight consecutive quarters of decline should be termed L-shaped.
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
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
rather than invest. Such expectations can create a self-reinforcing downward cycle, bringing about or worsening a recession. Consumer confidence is one measure used to evaluate economic sentiment. The term
animal spirits has been used to describe the
psychological factors underlying economic activity. Keynes, in his ''
The General Theory of Employment, Interest and Money
''The General Theory of Employment, Interest and Money'' is a book by English economist John Maynard Keynes published in February 1936. It caused a profound shift in economic thought, giving macroeconomics a central place in economic theory and ...
'', was the first economist to claim that such emotional mindsets significantly affect the economy.
Economist
Robert J. Shiller
Robert James Shiller (born March 29, 1946) is an American economist, academic, and author. As of 2019, he serves as a Sterling Professor of Economics at Yale University and is a fellow at the Yale School of Management's International Center for ...
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."
Behavioral economics has also explained many psychological biases that may trigger a recession including the
availability heuristic
The availability heuristic, also known as availability bias, is a mental shortcut that relies on immediate examples that come to a given person's mind when evaluating a specific topic, concept, method, or decision. This heuristic, operating on the ...
, the
money illusion
In economics, money illusion, or price illusion, is a cognitive bias where money is thought of in nominal, rather than real terms. In other words, the face value (nominal value) of money is mistaken for its purchasing power (real value) at a previ ...
, and
normalcy bias.
Balance sheet recession
Excessive levels of indebtedness or the bursting of a real estate or financial asset price bubble can cause what is called a "balance sheet recession". This occurs when large numbers of consumers or corporations pay down debt (i.e., save) rather than spend or invest, which slows the economy.
The term
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a Partnersh ...
derives from an accounting identity that holds that assets must always equal the sum of liabilities plus equity.
If asset prices fall below the value of the debt incurred to purchase them, then the equity must be negative, meaning the consumer or corporation is insolvent. Economist
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was ...
wrote in 2014 that "the best working hypothesis seems to be that the
financial crisis
A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
was only one manifestation of a broader problem of excessive debt—that it was a so-called "balance sheet recession". In Krugman's view, such crises require debt reduction strategies combined with higher government spending to offset declines from the private sector as it pays down its debt.
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
Negative equity is a deficit of owner's equity, occurring when the value of an asset used to secure a loan is less than the outstanding balance on the loan. In the United States, assets (particularly real estate, whose loans are mortgages) with ne ...
, meaning their assets were worth less than their liabilities. Despite zero
interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...
s and expansion of the
money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circul ...
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.
Krugman discussed the balance sheet recession concept in 2010, agreeing with Koo's situation assessment and view that sustained
deficit spending
Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
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).
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.
Liquidity trap
A
liquidity trap is a
Keynesian
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output an ...
theory that a situation can develop in which interest rates reach near zero (
zero interest-rate policy
Zero interest-rate policy (ZIRP) is a macroeconomic concept describing conditions with a very low nominal interest rate, such as those in contemporary Japan and in the United States from December 2008 through December 2015. ZIRP is considere ...
) 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; increasing the money supply is like "
pushing on a string
Pushing on a string is a figure of speech for influence that is more effective in moving things in one direction than another – you can ''pull,'' but not ''push.''
If something is connected to someone by a string, they can move it toward themse ...
".
Economist
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was ...
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
Quantitative easing (QE) is a monetary policy action whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary pol ...
or other techniques in which money is effectively printed to purchase assets, thereby creating
inflationary Inflationism is a heterodox economic, fiscal, or monetary policy, that predicts that a substantial level of inflation is harmless, desirable or even advantageous. Similarly, inflationist economists advocate for an inflationist policy.
Mainstream ec ...
expectations that cause savers to begin spending again. Government stimulus spending and
mercantilist
Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce ...
policies to stimulate exports and reduce imports are other techniques to stimulate demand.
He estimated in March 2010 that developed countries representing 70% of the world's GDP were caught in a liquidity trap.
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
The paradox of thrift (or paradox of saving) is a paradox of economics. The paradox states that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower ''total'' saving ...
and can cause or deepen a recession. Economist
Hyman Minsky
Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an American economist, a professor of economics at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. His research at ...
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.
In April 2009, U.S. Federal Reserve Vice Chair
Janet Yellen
Janet Louise Yellen (born August 13, 1946) is an American economist serving as the 78th United States secretary of the treasury since January 26, 2021. She previously served as the 15th chair of the Federal Reserve from 2014 to 2018. Yellen is ...
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 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."
Predictors
A handful of measures exist that are held to generally predict the possibility of a recession:
* The U.S. Conference Board's Present Situation Index year-over-year change turns negative by more than 15 points before a recession.
* The U.S. Conference Board Leading Economic Indicator year-over-year change turns negative before a recession.
* When the CFNAI Diffusion Index drops below the value of −0.35, then there is an of the beginning a recession. Usually, the signal happens in the three months of the recession. The CFNAI Diffusion Index signal tends to happen about one month before a related signal by the CFNAI-MA3 (3-month moving average) drops below the −0.7 level. The CFNAI-MA3 correctly identified the 7 recessions between March 1967 – August 2019, while triggering only 2 false alarms.
Except for the above, there are no known completely reliable predictors. Analysis by
Prakash Loungani
Prakash Loungani is a macroeconomist known for his work on the difficulty of forecasting recessions (“the record of failure to predict recessions is virtually unblemished”), which has been featured in the Financial Times and The Guardian and ...
of the
International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
found that only two of the sixty recessions around the world during the 1990s had been predicted by a consensus of economists one year earlier, while there were zero consensus predictions one year earlier for the 49 recessions during 2009.
However, the following are considered possible predictors:
* The Federal Reserve Bank of Chicago posts updates of the Brave-Butters-Kelley Indexes (BBKI).
* The Federal Reserve Bank of St. Louis posts the Weekly Economic Index (Lewis-Mertens-Stock) (WEI).
* The Federal Reserve Bank of St. Louis posts the Smoothed U.S. Recession Probabilities (RECPROUSM156N).
*
Inverted yield curve
In finance, an inverted yield curve happens when a yield curve graph of typically government bonds inverts in the opposite direction and the shorter term US Treasury bonds are offering a higher yield than the long-term Treasury bonds. Long ...
, 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.
[Park, B.U., Simar, L. & Zelenyuk, V. (2020]
"Forecasting of recessions via dynamic probit for time series: replication and extension of Kauppi and Saikkonen (2008)"
. Empirical Economics 58, 379–392. https://doi.org/10.1007/s00181-019-01708-2
* The three-month change in the
unemployment rate
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refere ...
and initial jobless claims. U.S. unemployment index is defined as the difference between the 3-month average of the
unemployment rate
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refere ...
and the 12-month minimum of the unemployment rate. Unemployment momentum and acceleration with Hidden Markov model.
*
Index of Leading (Economic) Indicators (includes some of the above indicators).
* Lowering of asset prices, such as homes and financial assets, or high personal and corporate debt levels.
*
Commodity prices
In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.
The price of a comm ...
may increase before recessions, which usually hinders consumer spending by making necessities like transportation and housing costlier. This will tend to constrict spending for non-essential goods and services. Once the recession occurs, commodity prices will usually reset to a lower level.
* Increased
income inequality
There are wide varieties of economic inequality, most notably income inequality measured using the distribution of income (the amount of money people are paid) and wealth inequality measured using the distribution of wealth (the amount of we ...
.
* Decreasing
recreational vehicle shipments.
* Declining trucking volumes.
* The S&P 500 and BBB bond spread.
Government responses
Keynesian economists
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output a ...
favor the use of expansionary macroeconomic policy during recessions to increase
aggregate demand.
Strategies favored for moving an economy out of a recession vary depending on which economic school the policymakers follow.
Monetarists
Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on nationa ...
, exemplified by economist
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
, would favor the use of
limited expansionary
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
, while
Keynesian
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output an ...
economists may advocate increased
government spending to spark economic growth.
Supply-side
Supply-side economics is a macroeconomic theory that postulates economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade. According to supply-side economics, consumers will benefit fr ...
economists promote tax cuts to stimulate business
capital investment. For example, the Trump administration claimed that lower effective tax rates on new investment imposed by the
Tax Cuts and Jobs Act of 2017
The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, , is a congressional revenue act of the United States originally introduced in Congress as the Tax Cuts and Jobs A ...
would raise investment, thereby making workers more productive and raising output and wages. Investment patterns in the United States through 2019, however, indicated that the supply-side incentives of the TCJA had little effect on investment growth. Although investments increased after 2017, much of the increase was a response to oil prices, and investment in other sectors had negligible growth.
Monetarist economists have argued that objectives of monetary policy, i.e., controlling the money supply to influence interest rates, are best achieved by targeting the growth rate of the money supply. They maintain that money may affect output in the short term but that in the long run, expansionary monetary policy leads to inflation only. Keynesian economists have mostly adopted this analysis, modifying the theory with better integration of short and long run trends and an understanding that a change in the money supply "affects only nominal variables in the economy, such as prices and wages, and has no effect on real variables, like employment and output".
The Federal Reserve traditionally uses monetary accommodation, a policy instrument of lowering its main benchmark interest rate, to accommodate sudden supply-side shifts in the economy. When the
federal funds rate
In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. Reserve balances a ...
reaches the boundary of an interest rate of 0%, called the
zero lower bound The Zero Lower Bound (''ZLB'') or Zero Nominal Lower Bound (''ZNLB'') is a macroeconomic problem that occurs when the short-term nominal interest rate is at or near zero, causing a liquidity trap and limiting the central bank's capacity to stimulate ...
, the government resorts to unconventional monetary policy to stimulate recovery.
Gauti B. Eggertsson of the Federal Reserve Bank of New York, using a
New Keynesian
New Keynesian economics is a school of macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroec ...
macroeconomic
model
A model is an informative representation of an object, person or system. The term originally denoted the plans of a building in late 16th-century English, and derived via French and Italian ultimately from Latin ''modulus'', a measure.
Models c ...
for policy analysis, writes that cutting taxes on labor or capital is contractionary under certain circumstances, such as those that prevailed following the economic crisis of 2008, and that temporarily increasing government spending at such times has much larger effects than under normal conditions. He says other forms of tax cuts, such as a reduction in sales taxes and investment tax credits, e.g., in the context of Japan's "Great Recession", are also very effective. Eggertsson infers from his analysis that the contractionary effects of labor and capital tax cuts, and the strong expansionary effect of government spending, are peculiar to the unusual environment created by zero interest rates. He asserts that with positive interest rates a labor tax cut is expansionary, per the established literature, but at zero interest rates, it reverses and tax cuts become contractionary. Further, while capital tax cuts are inconsequential in his model with a positive interest rate, they become strongly negative at zero, and the multiplier of government spending is then almost five times larger.
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was ...
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..."
John Maynard Keynes
John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...
believed that government institutions could stimulate aggregate demand in a crisis:
Stock market
Some recessions have been anticipated by stock market declines. In ''
Stocks for the Long Run
''Stocks for the Long Run'' is a book on investing by Jeremy Siegel. Its first edition was released in 1994. Its fifth edition was released on January 7, 2014. According to Pablo Galarza of ''Money'', "His 1994 book ''Stocks for the Long Run'' se ...
'', 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
The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States.
The DJIA is one of the oldest and most commonly followed equity inde ...
were not followed by a recession.
The
real estate
Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
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
The National Bureau of Economic Research (NBER) is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic c ...
(NBER) takes a few months to determine if a peak or trough has occurred in the US.
U.S. politics
An administration generally gets credit or blame for the state of the economy during its time in office; this state of affairs has caused disagreements about how particular recessions actually started.
For example, the
1981 recession is thought to have been caused by the tight-money policy adopted by
Paul Volcker
Paul Adolph Volcker Jr. (September 5, 1927 – December 8, 2019) was an American economist who served as the 12th chairman of the Federal Reserve from 1979 to 1987. During his tenure as chairman, Volcker was widely credited with having ended th ...
, chairman of the
Federal Reserve Board
The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the m ...
, before
Ronald Reagan took office. Reagan supported that policy. Economist
Walter Heller
Walter Wolfgang Heller (27 August 1915 – 15 June 1987) was a leading American economist of the 1960s, and an influential adviser to President John F. Kennedy as chairman of the Council of Economic Advisers, 1961–64.
Life and career
Heller ...
, chairman of the
Council of Economic Advisers in the 1960s, said that "I call it a Reagan-Volcker-Carter recession."
Consequences
Unemployment
Unemployment is particularly high during a recession. Many economists working within the
neoclassical paradigm argue that there is a
natural rate of unemployment
The natural rate of unemployment is the name that was given to a key concept in the study of economic activity. Milton Friedman and Edmund Phelps, tackling this 'human' problem in the 1960s, both received the Nobel Memorial Prize in Economic Scien ...
which, when subtracted from the actual rate of unemployment, can be used to estimate the
GDP gap
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
during a recession. In other words, unemployment never reaches 0%, so it is not a negative indicator of the health of an economy, unless it exceeds the "natural rate", in which case the excess corresponds directly to a loss in the GDP.
The full impact of a recession on employment may not be felt for several quarters. After recessions in Britain in the 1980s and 1990s, it took five years for unemployment to fall back to its original levels.
Employment discrimination claims rise during a recession.
Business
Productivity
Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proces ...
tends to fall in the early stages of a recession, then rises again as weaker firms close. The variation in
profitability
In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs.
It i ...
between firms rises sharply. The fall in productivity could also be attributed to several macro-economic factors, such as the loss in productivity observed across the UK due to
Brexit
Brexit (; a portmanteau of "British exit") was the withdrawal of the United Kingdom (UK) from the European Union (EU) at 23:00 GMT on 31 January 2020 (00:00 1 February 2020 CET).The UK also left the European Atomic Energy Community (EAEC ...
, which may create a mini-recession in the region.
Global epidemics
A pandemic () is an epidemic of an infectious disease that has spread across a large region, for instance multiple continents or worldwide, affecting a substantial number of individuals. A widespread endemic disease with a stable number of in ...
, such as
COVID-19
Coronavirus disease 2019 (COVID-19) is a contagious disease caused by a virus, the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The first known case was COVID-19 pandemic in Hubei, identified in Wuhan, China, in December ...
, could be another example, since they disrupt the global supply chain or prevent the movement of goods, services, and people.
Recessions have also provided opportunities for
anti-competitive
Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws differ among state and federal laws to ensure businesses do not engage in competitive practices that harm other, usuall ...
mergers, with a negative impact on the wider economy; the suspension of
competition policy
Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust ...
in the United States in the 1930s may have extended the Great Depression.
Social effects
The
living standards of people dependent on wages and
salaries
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis.
...
are not more affected by recessions than those who rely on
fixed incomes or
welfare benefits
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...
. The loss of a job is known to have a negative impact on the stability of families, and individuals' health and well-being. Fixed income benefits receive small cuts which make it tougher to survive.
History
Global
According to the
International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
(IMF), "Global recessions seem to occur over a cycle lasting between eight and 10 years."
[The Recession that Almost Was.](_blank)
Kenneth Rogoff, International Monetary Fund, Financial Times, 5 April 2002 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
Real gross domestic product (real GDP) is a macroeconomic measure of the value of economic output adjusted for price changes (i.e. inflation or deflation). This adjustment transforms the money-value measure, nominal GDP, into an index for quantit ...
growth of 3.0% or less in their view was "equivalent to a global recession".
By this measure, six periods since 1970 qualify: 1974–1975,
[Global Economic Slump Challenges Policies](_blank)
IMF. January 2009. 1980–1983,
1990–1993,
1998,
2001–2002,
and 2008–2009.
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''.
In April 2009, IMF had changed their Global recession definition to "A decline in annual percapita 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, percapita investment, and percapita consumption."
By this new definition, a total of four global recessions took place since
World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
: 1975, 1982, 1991 and 2009. All of them only lasted one year, although the third would have lasted three years (1991–1993) if IMF as criteria had used the normal exchange rate weighted percapita real World GDP rather than the purchase power parity weighted percapita real World GDP.
In 2020, the COVID-19 lockdowns and other government actions taken in early 2020 drove the global economy into a recession, the second largest global recession in recent history.
Australia
As a result of late 1920s profit issues in agriculture and cutbacks, 1931–1932 saw Australia's biggest recession in its entire history. It fared better than other nations that underwent
depressions, but their poor economic states influenced Australia, which depended on them for export, as well as
foreign investments. The nation also benefited from greater productivity in manufacturing, facilitated by trade protection, which also helped with lessening the effects.
The economy had gone into a brief recession in 1961 because of a credit squeeze. Australia was facing a rising level of
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
in 1973, caused partially by the oil crisis happening in that same year, which brought inflation at a 13% increase. Economic recession hit by the middle of the year 1974, with no change in policy enacted by the government as a measure to counter the economic situation of the country. Consequently, the unemployment level rose and the trade deficit increased significantly.
Another recession—the most recent one to date—came at the beginning of the 1990s as the result of a major stock collapse in October 1987, referred to now as
Black Monday
Black Monday refers to specific Mondays when undesirable or turbulent events have occurred. It has been used to designate massacres, military battles, and stock market crashes.
Historic events
*1209, Dublin – when a group of 500 recently arriv ...
. Although the collapse was larger than the one in 1929, the global economy recovered quickly, but North America still suffered a decline in lumbering savings and loans, which led to a crisis. The recession was not limited to the United States, but it also affected partnering nations such as Australia. The unemployment level increased to 10.8%, employment declined by 3.4% and the GDP also decreased as much as 1.7%. Inflation, however, was successfully reduced.
Australia faced recession in 2020 due to the impact of huge bush fires and the COVID-19 pandemic's effect on tourism and other important aspects of the economy.
European Union
The
Eurozone
The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro (€) as their primary currency and sole legal tender, and have thus fully implemented EMU policies ...
experienced a recession in 2012: the economies of the 17-nation region failed to grow during any quarter of the 2012 calendar year. The recession deepened during the final quarter of the year, with the
French,
German
German(s) may refer to:
* Germany (of or related to)
** Germania (historical use)
* Germans, citizens of Germany, people of German ancestry, or native speakers of the German language
** For citizens of Germany, see also German nationality law
**Ge ...
and
Italian
Italian(s) may refer to:
* Anything of, from, or related to the people of Italy over the centuries
** Italians, an ethnic group or simply a citizen of the Italian Republic or Italian Kingdom
** Italian language, a Romance language
*** Regional Ita ...
economies all affected.
United Kingdom
The most recent recession to affect the United Kingdom was the 2020 recession attributed to the
COVID-19
Coronavirus disease 2019 (COVID-19) is a contagious disease caused by a virus, the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The first known case was COVID-19 pandemic in Hubei, identified in Wuhan, China, in December ...
global pandemic, the first recession since the
Great Recession
The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
.
United States
![FFR treasuries](https://upload.wikimedia.org/wikipedia/commons/f/f5/FFR_treasuries.webp)
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.
From 1980 to 2018 there were only eight periods of negative economic growth over one fiscal quarter or more,
and four periods considered recessions:
*
July 1981 – November 1982: 15 months
*
July 1990 – March 1991: 8 months
*
March 2001 – November 2001: 8 months
*
December 2007 – June 2009: 18 months
For the last three of these 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.
Since then, the NBER has also declared a 2-month
COVID-19 recession
The COVID-19 recession, also referred to as the Great Lockdown, is a global economic recession caused by the COVID-19 pandemic. The recession began in most countries in February 2020.
After a year of global economic slowdown that saw stagnati ...
for February 2020 – April 2020.
In July 2022, the NBER released a statement regarding declaring a recession following a second consecutive quarter of shrinking GDP, "There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions".
NBER has sometimes declared a recession before a second quarter of GDP shrinkage has been reported, but beginnings and endings can also be declared over a year after they are reckoned to have occurred. In 1947, NBER did not declare a recession despite two quarters of declining GDP, due to strong economic activity reported for employment, industrial production, and consumer spending.
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,
and 2008 saw many other nations follow suit. The US recession of 2007 ended in June 2009 as the nation entered the current economic recovery. The
timeline of the Great Recession details the many elements of this period.
United States
The
United States housing market correction
United States housing prices experienced a major market correction after the housing bubble that peaked in early 2006. Prices of real estate then adjusted downwards in late 2006, causing a loss of market liquidity and subprime defaults.
A real ...
(a consequence of the
United States housing bubble
The 2000s United States housing bubble was a real-estate bubble affecting over half of the U.S. states. It was the impetus for the subprime mortgage crisis. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reac ...
) 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 indicated the depth and severity of the recession. With consumer confidence so low, economic recovery took a long time. Consumers in the U.S. were hit hard by the Great Recession, with the value of their houses dropping and their pension savings decimated on the stock market.
U.S. employers shed 63,000 jobs in February 2008, 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." 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's
Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides internationa ...
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. In 2008, an estimated 2.6 million U.S. jobs were eliminated.
The
unemployment rate
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refere ...
in the U.S. grew to 8.5% in March 2009, and there were 5.1 million job losses by March 2009 since the recession began in December 2007. That was about five million more people unemployed compared to just a year prior, which was the largest annual jump in the number of unemployed persons since the 1940s.
Although the US economy grew in the first quarter by 1%, 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. The third quarter of 2008 brought on a GDP retraction of 0.5%, 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.
A 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. They projected 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 represented significant downward revisions from the forecasts of three months prior.
A December 2008 report from the National Bureau of Economic Research stated that the U.S. had been in a recession since December 2007, when economic activity peaked, based on several measures including job losses, declines in personal income, and declines in real GDP. By July 2009, a growing number of economists believed that the recession may have ended. 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.
Prior to the start of the recession, it appears that no known formal theoretical or empirical model was able to accurately predict the advance of this recession, except for minor signals in the sudden rise of forecasted probabilities, which were still well under 50%.
See also
*
Credit crunch
A credit crunch (also known as a credit squeeze, credit tightening or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit cr ...
*
Deflation
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflatio ...
*
Depression
*
Disinflation
Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation's gross domestic product over time. It is the opposite of reflation.
If the inflation r ...
*
Economic collapse
Economic collapse, also called economic meltdown, is any of a broad range of bad economic conditions, ranging from a severe, prolonged depression with high bankruptcy rates and high unemployment (such as the Great Depression of the 1930s), to a ...
*
Economic stagnation
Economic stagnation is a prolonged period of slow economic growth (traditionally measured in terms of the GDP growth), usually accompanied by high unemployment. Under some definitions, "slow" means significantly slower than potential growth as e ...
*
Flooding the market
Flooding the market is an excess amount of inventory for sale causing an undesired drop in price for the product that can, in extreme cases, make the price go negative or make the products impossible to sell at any price.
Businesses take measure ...
*
Foreclosure
*
Inventory bounce
*
List of recessions in the United States
There have been as many as 48 recessions in the United States dating back to the Articles of Confederation, and although economists and historians dispute certain 19th-century recessions, the consensus view among economists and historians is that ...
*
Overproduction
In economics, overproduction, oversupply, excess of supply or glut refers to excess of supply over demand of products being offered to the market. This leads to lower prices and/or unsold goods along with the possibility of unemployment.
The d ...
*
Stagflation
In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actio ...
*
Underconsumption Underconsumption is a theory in economics that recessions and stagnation arise from an inadequate consumer demand, relative to the amount produced. In other words, there is a problem of overproduction and overinvestment during a demand crisis. The ...
*
COVID-19 recession
The COVID-19 recession, also referred to as the Great Lockdown, is a global economic recession caused by the COVID-19 pandemic. The recession began in most countries in February 2020.
After a year of global economic slowdown that saw stagnati ...
References
External links
*
Business Cycle Expansions and ContractionsThe National Bureau Of Economic Research
{{Authority control
Unemployment
Business cycle
de:Konjunktur#Rezession