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In
economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. The term was fo ...

economics
, a recession is a
business cycle The business cycle, also known as the economic cycle or trade cycle, are the fluctuations of gross domestic product Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a sp ...

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 In economics, a demand shock is a sudden event that increases or decreases demand for Good (economics), goods or Service (economics), services temporarily. A positive demand shock increases aggregate demand (AD) and a negative demand shock decreas ...
). 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 many ...
, an external trade shock, an adverse
supply shock A supply shock is an event that suddenly increases or decreases the supply Supply may refer to: *The amount of a resource A resource is a source or supply from which a benefit is produced and that has some utility. Resources can broadly be clas ...
, the bursting of an
economic bubble An economic bubble is a situation in which asset prices are much higher than the underlying fundamentals can reasonably justify. Bubbles are sometimes caused by unlikely and overly optimistic projections about the future. It could also be describ ...
, or a large-scale
anthropogenic Anthropogenic ("human" + "generating") is an adjective that may refer to: * Anthropogeny, the study of the origins of humanity Counterintuitively, anthropogenic may also refer to things that have been generated by humans, as follows: * Human imp ...
or
natural disaster A natural disaster is a major adverse event An adverse event (AE) is any untoward medical occurrence in a patient or clinical investigation subject administered a pharmaceutical product and which does not necessarily have a causal relationsh ...
(e.g. a
pandemic A pandemic (from Greek#REDIRECT Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approxi ...

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 Gross domestic product (GDP) is a monetary In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner">174x174px Money is any ...
, 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 Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), producti ...
, such as
increasing money supply
increasing money supply
or
increasing government spending and decreasing taxation
increasing government spending and decreasing taxation
.


Definition

In a 1974 ''
The New York Times ''The New York Times'' (''NYT'' or ''NY Times'') is an American daily newspaper based in New York City with a worldwide readership. Founded in 1851, the ''Times'' has since won List of Pulitzer Prizes awarded to The New York Times, 130 Pulit ...

The New York Times
'' article, Commissioner of the Bureau of Labor Statistics Julius Shiskin suggested several rules of thumb for defining a recession, one of which was two consecutive quarters of negative GDP growth. In time, the other rules of thumb were forgotten. Some economists prefer a definition of a 1.5-2 percentage points rise in unemployment within 12 months. 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 in . It consists of 50 , a , five major , 326 , and some . At , it is the world's . The United States shares significan ...

United States
, the Business Cycle Dating Committee of the
National Bureau of Economic Research The National Bureau of Economic Research (NBER) is an American private nonprofit A nonprofit organization (NPO), also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and oper ...
(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 Index m ...
,
real income Real income is the income of individuals or nations after adjusting for inflation. It is calculate, calculated by dividing Real versus nominal value (economics), nominal income by the price level. real versus nominal value (economics), Real variabl ...
, employment,
industrial productionIndustrial production is a measure of output of the industrial sector of the economy An economy (from Greek language, Greek οίκος – "household" and νέμoμαι – "manage") is an area of the Production (economics), production, Distri ...
, and
wholesale Wholesaling or distributing is the sale of goods or merchandise Merchandising is any practice which contributes to the sale of products to a retail consumer A consumer is a person or a group who intends to order, orders, or uses purch ...
-
retail sales Retail is the process of selling consumer goods A final goods or consumer goods is a commodity that is used by the consumer to satisfy current wants or needs, unlike intermediate goods which is utilized to produce another goods. A microwave o ...
". Almost universally, academics, economists, policy makers, and businesses refer to the determination by the NBER for the precise dating of a recession's onset and end. In the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shorth ...

United Kingdom
,
recessions In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
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 Index m ...
. The
European Union The European Union (EU) is a political and economic union of member states that are located primarily in Europe Europe is a which is also recognised as part of , located entirely in the and mostly in the . It comprises the wester ...

European Union
does not use this definition, instead using a range of other criteria such as employment rate and the depth of decline in economic activity.


Attributes

A recession has many attributes that can occur simultaneously and includes declines in component measures of economic activity (GDP) such as consumption,
investment Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In , the purpose of investing is to generate a from the inve ...
, 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 business Business is the activity of making one's living or making money by producing or buying and selling Product (business), products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." ...
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. 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 An economic depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe economic downturn than a economic recession, recession, which is a slowdown in economic activity over the course of a norma ...
, although some argue that their causes and cures can be different."What is the difference between a recession and a depression?"
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 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 Gaussian function, bell-shaped curve has the shape ...
,
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 Gaussian function, bell-shaped curve has the shape ...
, 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 Korea is a region In geography, regions are areas that are broadly divided by physical characteristics (physical geography), human impact characteristics (human geography), and the interaction of humanity and the environment (environmental ...

Korea
,
Hong Kong Hong Kong (; , ), officially the Hong Kong Special Administrative Region of the People's Republic of China (HKSAR), is a city A city is a large human settlement.Goodall, B. (1987) ''The Penguin Dictionary of Human Geography''. London: Pe ...

Hong Kong
and South-east Asia experienced U-shaped recessions in 1997–98, although
Thailand Thailand ( th, ประเทศไทย), historically known as Siam, () officially the Kingdom of Thailand, is a country in Southeast Asia. It is located at the centre of the Mainland Southeast Asia, Indochinese Peninsula, spanning , wi ...

Thailand
'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 main functions of money are distinguished as: a ...

money
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 Psychology is the scientific Science () is a systematic enterprise that Scientific method, builds and organizes knowledge in the form of Testability, testable explanations and predictions about the universe."... modern science is ...
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." Behavioral economics, has also explained some psychological biases that may trigger a recession including availability heuristic, money illusion, and non-regressive prediction.


Balance sheet recession

High 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 is 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 Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
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 An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concepts f ...
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 Real estate is property consis ...
, meaning their assets were worth less than their liabilities. Despite zero
interest rate An interest rate is the amount of interest In and , interest is payment from a or deposit-taking financial institution to a or depositor of an amount above repayment of the (that is, the amount borrowed), at a particular rate. It is disti ...
s and expansion of the
money supply In macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is a social science Social science is the Branches of science, branch of science dev ...
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 The Great Depression was a severe worldwide economic depression An economic depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe economic downturn than a economic recession, recess ...
, 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 during 2010, agreeing with Koo's situation assessment and view that sustained
deficit spending Deficit spending is the amount by which spending exceeds revenue In accounting, revenue is the income or increase in net assets that an entity has from its normal activities (in the case of a business, usually from the sale of product (business) , ...
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 The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in home prices after the collaps ...
. 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 A liquidity trap is a situation, described in Keynesian economics, in which, "after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash ...
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 Paul Robin Krugman ( ; born February 28, 1953) is an American economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concepts f ...
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 whereby a central bank purchases predetermined amounts of government bonds or other financial assets (e.g., municipal bonds, corporate bonds, stocks, etc.) in order to inject money into the economy to ...
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 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 a ...

mercantilist
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 thriftThe paradox of thrift (or paradox of saving) is a paradox A paradox is a logically self-contradictory statement or a statement that runs contrary to one's expectation. It is a statement that, despite apparently valid reasoning from true premises, ...

paradox of thrift
and can cause or deepen a recession. Economist
Hyman Minsky Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an American economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories ...
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. During April 2009, U.S. Federal Reserve Vice Chair
Janet Yellen Janet Louise Yellen (born August 13, 1946) is an American economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concepts from ...
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 Feedback occurs when outputs of a system are routed back as inputs as part of a chain A chain is a assembly of connected pieces, called links, typically made of metal, with an overall character similar to that of a in that it is flexib ...

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."


Predictors

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 increased probability 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, but 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 Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avai ...

Inverted yield curve
, the model developed by economist Jonathan H. Wright, uses yields on 10-year and three-month Treasury securities as well as the Fed's overnight funds rate. Another model developed by Federal Reserve Bank of New York economists uses only the 10-year/three-month spread.,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 (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid or but currently available for work during the . Unemployment is measured by the unemplo ...
and initial jobless claims. U.S. unemployment index defined as the difference between the 3-month average of the
unemployment rate Unemployment, according to the (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid or but currently available for work during the . Unemployment is measured by the unemplo ...
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 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 measured using the distribution of incomeIn economics Economics () is the social science that studies how people interact with value; in particular, the Production (econom ...
. * Decreasing
recreational vehicle A recreational vehicle, often abbreviated as RV, is a motor vehicle A motor vehicle, also known as motorized vehicle or automotive vehicle, is a self-propelled vehicle, commonly wheeled, that does not operate on Track (rail transport), rails ...

recreational vehicle
shipments. * Declining trucking volumes. Analysis by Prakash Loungani of the
International Monetary Fund The International Monetary Fund (IMF) is an international financial institution, headquartered in Washington, D.C. ) , image_skyline = , image_caption = Clockwise from top left: the Washington Monument The ...

International Monetary Fund
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.


S&P 500 and BBB bond spread to shows the probability of a recession

A study using the S&P 500 and BBB bond spread to shows the probability of a recession in the next year.


Peaking of High Yield Bonds Spread relation to S&P 500 Returns

A study reported that the average returns of the S&P 500 were -19% in the 3rd month before the Peaking of the High Yield Bonds Spread (BBB), but were +41% in the 24th month after the Peaking.


Government responses

Most mainstream economists believe that recessions are caused by inadequate
aggregate demand In macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branc ...
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 Monetarism is a school of thought A school of thought, or intellectual tradition, is the perspective of a group of people who share common characteristics of opinion or outlook of a philosophy Philosophy (from , ) is the study of gen ...
would favor the use of expansionary
monetary policy Monetary policy is the policy adopted by the monetary authority In finance and economics, a monetary authority is the entity that manages a country’s currency and money supply, often with the objective of controlling inflation targeting, infla ...

monetary policy
, while Keynesian economists may advocate increased
government spending Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting A variety of measures of national income and output are used in economics to estimate total economic activit ...
to spark economic growth. Supply-side economists may suggest tax cuts to promote business
capital Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase or capitals (or more formally ''majuscule'') and smaller lowercase (or more formally ''minusc ...
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 In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plan ...

fiscal policy
—tax cuts or increased government spending—works when monetary policy fails. Spending is more effective because of its larger
multiplierMultiplier may refer to: Mathematics * Multiplier (coefficient), the number of multiples being computed in multiplication, also known as a coefficient in algebra * Lagrange multiplier, a scalar variable used in mathematics to solve an optimisati ...
but tax cuts take effect faster. For example,
Paul Krugman Paul Robin Krugman ( ; born February 28, 1953) is an American economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concepts f ...
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..."


Keynes on Government Response

John Maynard Keynes John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946) was an English economist An economist is a professional and practitioner in the social science Social science is the branch The branches and leaves of a ...

John Maynard Keynes
believed that government institutions could stimulate aggregate demand in a crisis. "Keynes showed that if somehow the level of aggregate demand could be triggered, possibly by the government printing currency notes to employ people to dig holes and fill them up, the wages that would be paid out would resuscitate the economy by generating successive rounds of demand through the multiplier process"


Stock market

Some recessions have been anticipated by the stock market declines. In ''
Stocks for the Long Run ''Stocks for the Long Run'' is a book on investing To invest is to allocate money in the expectation of some benefit/return in the future. In other words, to invest means owning an asset or an item with the goal of generating income from the in ...
'', 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 price-weighted measurement stock market index In finance, a stock index, or stock market index, is an Index (economics), index that measures a stock market, or ...

Dow Jones Industrial Average
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 resource Natural resources are resource Resource refers to all the materials available in our environment which help us to satisfy our needs a ...

real-estate
market also usually weakens before a recession. However real-estate declines can last much longer than recessions. Since the business cycle is very hard to predict, Siegel argues that it is not possible to take advantage of economic cycles for timing investments. Even the
National Bureau of Economic Research The National Bureau of Economic Research (NBER) is an American private nonprofit A nonprofit organization (NPO), also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and oper ...
(NBER) takes a few months to determine if a peak or trough has occurred in the US. During an economic decline, high-yield stocks such as
fast-moving consumer goods Fast-moving consumer goods (FMCG), also known as consumer packaged goods (CPG), are products that are sold quickly and at a relatively low cost. Examples include non-durable household goodsHousehold goods are goods and products used within ...
,
pharmaceutical A medication (also called medicament, medicine, pharmaceutical drug, medicinal drug or simply drug) is a drug used to medical diagnosis, diagnose, cure, therapy, treat, or preventive medicine, prevent disease. Drug therapy (pharmacotherapy) ...
s, and
tobacco Tobacco is the common name of several plants in the genus Genus /ˈdʒiː.nəs/ (plural genera /ˈdʒen.ər.ə/) is a taxonomic rank In biological classification In biology, taxonomy () is the scientific study of naming, defini ...

tobacco
tend to hold up better. However, when the economy starts to recover and the bottom of the market has passed,
growth stockIn finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available w ...
s tend to recover faster. There is significant disagreement about how health care and utilities tend to recover. Diversifying one's portfolio into international stocks may provide some safety; however, economies that are closely correlated with that of the U.S. may also be affected by a recession in the U.S. There is a view termed the ''halfway rule'' according to which investors start discounting an economic recovery about halfway through a recession. In the 16 U.S. recessions since 1919, the average length has been 13 months, although the recent recessions have been shorter. Thus, if the 2008 recession had 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.


Politics

Generally, an administration gets credit or blame for the state of economy during its time. This has caused disagreements about on how it actually started. In an economic cycle, a downturn can be considered a consequence of an expansion reaching an unsustainable state, and is corrected by a brief decline. Thus it is not easy to isolate the causes of specific phases of the cycle. The 1981 recession is thought to have been caused by the tight-money policy adopted by
Paul Volcker Paul Adolph Volcker Jr. (; September 5, 1927 – December 8, 2019) was an American economist. He served two terms as the 12th Chair of the Federal Reserve The chair of the Board of Governors of the Federal Reserve System is the head of the Fed ...
, chairman of the Federal Reserve Board, before
Ronald Reagan Ronald Wilson Reagan ( ; February 6, 1911June 5, 2004) was an American politician who served as the 40th president of the United States The president of the United States (POTUS) is the and of the . The president directs the of ...

Ronald Reagan
took office. Reagan supported that policy. Economist Walter Heller, chairman of the
Council of Economic Advisers The Council of Economic Advisers (CEA) is a 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 Continental United States, primarily located in North Ame ...

Council of Economic Advisers
in the 1960s, said that "I call it a Reagan-Volcker-Carter recession." The resulting taming of
inflation In economics, inflation refers to a general progressive increase in prices 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 r ...

inflation
did, however, set the stage for a robust growth period during Reagan's presidency. Economists usually teach that to some degree recession is unavoidable, and its causes are not well understood.


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 Prize in Economics, Nobel Prize ...
which, when subtracted from the actual rate of unemployment, can be used to calculate the negative
GDP Gross domestic product (GDP) is a monetary In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner">174x174px Money is any ...
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 the gross domestic product, or
GDP Gross domestic product (GDP) is a monetary In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner">174x174px Money is any ...
. The full impact of a recession on employment may not be felt for several quarters. Research in Britain shows that low-skilled, low-educated workers and the young are most vulnerable to unemployment in a downturn. After recessions in Britain in the 1980s and 1990s, it took five years for unemployment to fall back to its original levels. Many companies often expect employment discrimination claims to rise during a recession.


Business

Productivity Productivity is the efficiency Efficiency is the (often measurable) ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do th ...
tends to fall in the early stages of a recession, then rises again as weaker firms close. The variation in
profitability An economic profit is the difference between the revenue a has received from its outputs and the s of its inputs. Unlike an , an economic profit takes into account both a 's and costs, whereas an accounting profit only relates to the explici ...
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 UK due to
Brexit Brexit (; a portmanteau of "British exit") was the Withdrawal from the European Union, withdrawal of the United Kingdom (UK) from the European Union (EU) and the European Atomic Energy Community (EAEC or Euratom) at 23:00 31 January 2020 Green ...

Brexit
, which may create a mini-recession in the region. , such as
COVID-19 Coronavirus disease 2019 (COVID-19) is a contagious disease A contagious disease is a disease A disease is a particular abnormal condition that negatively affects the structure A structure is an arrangement and organization o ...
, could be another example, since they disrupt the global supply chain or prevent movement of goods, services and people. Recessions have also provided opportunities for
anti-competitive Anti-competitive practices are business or government practices that unlawfully prevent or reduce competition Competition arises whenever two or more parties strive for a common goal A goal is an idea of the future or desired result tha ...
merger In corporate finance Corporate finance is the area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, ...
s, with a negative impact on the wider economy: the suspension of
competition policy Competition law is a law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, ...
in the United States in the 1930s may have extended the Great Depression.


Social effects

The
living standards Standard of living is the level of income, comforts and services available, generally applied to a society or location, rather than to an individual. Standard of living is relevant because it is considered to contribute to an individual's quality ...
of people dependent on wages and
salaries A salary is a form of payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wage A wage is the distribution from an employer Employment is a relationship between two parties ...
are not more affected by recessions than those who rely on
fixed income Fixed income refers to any type of investment To invest is to allocate money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs ...
s 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. 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 an international financial institution, headquartered in Washington, D.C. ) , image_skyline = , image_caption = Clockwise from top left: the Washington Monument The ...

International Monetary Fund
(IMF), "Global recessions seem to occur over a cycle lasting between eight and 10 years."The Recession that Almost Was.
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 Index m ...
growth of 3.0 percent 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
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 global war A world war is "a war War is an intense armed conflict between states State may refer to: Arts, entertainment, and media Literatur ...
: 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 percapita real World GDP rather than the purchase power parity weighted percapita real World GDP.


Australia

The worst recession Australia has ever suffered happened in the beginning of the 1930s. 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 Depression may refer to: Mental health * Depression (mood), a state of low mood and aversion to activity * Mood disorders characterized by depression are commonly referred to as simply ''depression'', including: ** Dysthymia ** Major depressive ...
, but their poor economic states influenced Australia's as well, that depended on them for export, as well as
foreign investments A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment A foreign portfolio inv ...
. The nation also benefited from bigger productivity in manufacturing, facilitated by trade protection, which also helped with feeling the effects less. Due to a credit squeeze, the economy had gone into a brief recession in 1961 Australia was facing a rising level of
inflation In economics, inflation refers to a general progressive increase in prices 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 r ...

inflation
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 in the 1990s, at the beginning of the decade. It was the result of a major stock collapse in 1987, in October, referred to now as Black Monday. 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 wasn't limited to only America, 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 is facing recession in 2020 due to the impact of the bush fires and COVID-19 impacting tourism and other important aspects of the economy.


United Kingdom

The most recent recession to affect the United Kingdom was the 2020 recession attributed to the COVID‑19 global pandemic, the first recession since the
late-2000s recession The Great Recession was a period of marked general decline (recession In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (e ...
.


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. However, since 1980 there have been 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 * February 2020–April 2020: 2 months 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.


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 (a consequence of the
United States housing bubble The United States housing bubble A housing bubble (or a housing price bubble) is one of several types of Economic bubble, asset price bubbles which periodically occur in the market. The basic concept of a housing bubble is the same as for other ...
) and
subprime mortgage crisis The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in home prices after the collaps ...
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 In investment To invest is to allocate money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to Kin ...
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 (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid or but currently available for work during the . Unemployment is measured by the unemplo ...

unemployment rate
in the U.S. grew to 8.5 percent 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 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. 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. had 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. 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 cru ...
*
Deflation In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behav ...

Deflation
*
Depression Depression may refer to: Mental health * Depression (mood), a state of low mood and aversion to activity * Mood disorders characterized by depression are commonly referred to as simply ''depression'', including: ** Dysthymia ** Major depressive ...
*
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 Gross domestic product (GDP) is a money, monetary Measurement in ...
*
Economic collapse Economic collapse is any of a broad range of bad economic conditions, ranging from a severe, prolonged depression with high bankruptcy rates and high unemployment Unemployment, according to the OECD (Organisation for Economic Co-operation and ...
*
Economic stagnation Economic stagnation is a prolonged period of slow economic growth Economic growth can be defined as the increase in the inflation-adjusted market value of the goods and services produced by an economics, economy over time. Statisticians convent ...
*
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 negative pricing, price go negative or make the products impossible to sell at any price. Busines ...
*
Foreclosure Foreclosure is a legal process in which a lender A creditor or lender is a party 300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' party in 19th century Denmark A party is a gathering of ...
* Inventory bounce *
Overproduction In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
*
Stagflation In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
*
UnderconsumptionUnderconsumption is a theory in economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economi ...
*
COVID-19 recession The COVID-19 recession is a severe global economic crisis which caused a recession or a depression in many countries. It is the worst global economic crisis since the Great Depression. The crisis began due to the COVID-19 lockdowns and oth ...


References


External links

*
Business Cycle Expansions and Contractions
The National Bureau Of Economic Research {{Authority control Unemployment Business cycle de:Konjunktur#Rezession