What is the Meaning of Recession?
Recession Meaning – A recession is a significant, widespread, and long-term decline in economic activity. As a general rule, two consecutive quarters of negative gross domestic product (GDP) growth indicate a recession, although more complex formulas are used.
Economic Recession Definition
Economic Recession Definition – A recession is a slowdown or massive decline in economic activity. A sharp drop in spending generally leads to a recession.
Economic Recession Description
Economic Recession Description – Such a slowdown in economic activities can last for some quarters and completely hamper the growth of the economy. In such a situation, economic indicators such as GDP, company profits, employment, etc. fall.
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Economists at the National Bureau of Economic Research (NBER) measure recessions by looking at nonfarm payrolls, industrial production and retail sales, among other things, which go well beyond the simpler (though not as precise) negative two-quarters of GDP measure.
However, the NBER also says that “there is no hard and fast rule about what measures contribute information to the process or how they are weighted in our decisions.”
Recession Meaning & Definition Points Highlights
- A recession is a significant, pervasive and permanent decline in economic activity.
- Economists measure the length of a recession from the peak of the previous expansion to the bottom of the downturn.
- Recessions may last only a few months, but the economy may not recover to its former peak for several years.
- The inverted yield curve predicted the last 10 recessions, although some predicted recessions never materialized.
- Unemployment often remains high until economic recovery, so the early stages of a recovery can feel like an ongoing recession to many.
- States use fiscal and monetary policy to limit recession risks.
What is the Definition of Recession?
Recession Definition – A decline must be deep, pervasive and persistent to qualify as a recession under the NBER’s definition, but these challenges come after the fact: There is no clear pattern for identifying a recession once it begins.
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In June 2020, the NBER reported that the expansion of the US economy peaked in February 2020 and fell into recession the next month due to the COVID-19 pandemic. The economic expansion that began in June 2009 lasted 128 months, surpassing the 120-month expansion from 1991 to 2001 as the longest stretch of continuous growth in US history. In July 2021, the NBER concluded that the 2020 recession was the shortest on record—just two months, with economic activity bottoming out in April 2020.
Understanding the Recession
Since the Industrial Revolution, most economies have grown steadily, and economic contractions are the exception, although recessions are still common. Between 1960 and 2007, according to the International Monetary Fund (IMF), there were 122 recessions, affecting 21 advanced economies about 10% of the time.
In recent years, recessions have become less frequent and do not last as long.
The declines in economic performance and employment that recessions cause can be self-perpetuating. For example, declining consumer demand may prompt companies to lay off workers, which affects consumer purchasing power, which may further weaken consumer demand.
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Similarly, the bear markets that often accompany recessions can reverse the wealth effect, suddenly making people less wealthy and further reducing consumption.
Since the Great Depression, governments around the world have adopted fiscal and monetary policies to prevent the general recession from getting worse. Some of these stabilizing factors are automatic, such as unemployment insurance, which puts money in the pockets of workers who lose their jobs. Other measures require specific measures, such as lowering interest rates to stimulate investment.
Recessions are usually clearly identified only after they are over. Investors, economists, and employees can also have very different experiences of when a recession is at its worst.
Stock markets often fall before an economic downturn, so investors may assume a recession has begun as investment losses pile up and corporate profits decline, even as other recession indicators remain healthy, such as consumer spending and unemployment.
Conversely, because unemployment often remains high long after the economy bottoms out, workers may perceive a recession as continuing months or even years after economic activity recovers.
How We Can Predict a Recession?
While there is no single reliable predictor of recession, each of the 10 U.S. recessions since 1955 has been preceded by an inverted yield curve, although not every period of inverted yield curve has been followed by a recession.
When the yield curve is normal, short-term returns are lower than long-term returns. This is because longer-term debt has a greater duration risk. For example, a 10-year bond typically yields more than a 2-year bond because the investor takes the risk that future inflation or higher interest rates could reduce the value of the bond before it can be repaid. In this case, the yield rises over time, creating an upward-sloping yield curve.
The yield curve inverts if yields on bonds with longer maturities fall while yields on bonds with shorter maturities rise. A rise in short-term interest rates can plunge the economy into recession. The reason the yield on long-term bonds falls below the yield on short-term bonds is that traders anticipate short-term economic weakness leading to a possible reduction in interest rates.
Investors also watch various leading indicators to predict a recession. These include the ISM Purchasing Managers’ Index, the Conference Board’s leading economic index, and the OECD’s composite leading indicator.
What Causes Recession?
Reason for Recession – Numerous economic theories attempt to explain why and how the economy goes into recession. These theories can be broadly categorized as economic, financial, psychological, or a combination of these factors. Recession Meaning
Some economists focus on economic changes, including structural shifts in industries, as the most important. For example, a sharp, sustained increase in oil prices can raise costs throughout the economy and lead to a recession. Recession Meaning
Some theories say that financial factors cause recessions. These theories focus on the growth of credit and the accumulation of financial risk during good economic times, the reduction of credit and money supply when a recession begins, or both. Monetarism, which states that recessions are caused by insufficient growth in the money supply, is a good example of this type of theory. Recession Meaning
Other theories focus on psychological factors, such as exuberance during an economic boom and deep pessimism during a downturn, to explain why recessions occur and persist. Keynesian economics focuses on the psychological and economic factors that can reinforce and prolong recessions. The Minsky Moment concept, named after economist Hyman Minsky, combines the two to explain how the euphoria of a bull market can encourage unsustainable speculation. Recession Meaning
Main Difference Between Recession and depression
According to the NBER, the U.S. has experienced 34 recessions since 1854, but only five since 1980. The downturn after the global financial crisis in 2008 and the twin dips of the early 1980s were the worst since the Great Depression and 1937-38. recession. Recession Meaning
Routine recessions can cause GDP to fall by 2%, while severe recessions can shrink the economy by 5%, according to the IMF. A depression is a particularly deep and prolonged recession, although there is no universally accepted pattern to define it. Recession Meaning
During the Great Depression, US economic output fell by 33%, stocks fell by 80%, and unemployment reached 25%. During the recession of 1937-38, real GDP fell by 10%, while unemployment jumped to 20%. Recession Meaning
The Recent Recession
The 2020 COVID-19 pandemic and the public health restrictions imposed to stop it are an example of an economic shock that can cause a recession. The depth and widespread nature of the economic downturn caused by the COVID-19 pandemic in 2020 led the NBER to label it a recession despite its relatively short duration of two months. Recession Meaning
In 2022, many economic analysts debated whether or not the US economy was in recession, given that some economic indicators pointed to a recession and others did not.
Analysts at investment advisory firm Raymond James argued in an October 2022 report that the US economy is not in recession. Investment advisers say the economy has met the technical definition of a recession after two consecutive quarters of negative growth, but that a number of other positive economic indicators show the economy is not in recession. Recession Meaning
First, he cites the fact that employment has continued to grow even as GDP has fallen. The report goes on to point out that while real personal disposable income also fell in 2022, much of that fall was a result of the end of the COVID-19 aid stimulus and that personal income continued to grow without these payments. Recession Meaning
Data from The Federal Reserve Bank of St Louis as of the end of October 2022 similarly shows that the NBER’s key indicators do not point to the US economy being in recession. Recession Meaning
What Happens in a Recession?
Economic performance, employment, and consumer spending decline in a recession. Interest rates are also likely to fall as a central bank (such as the US Federal Reserve) cuts rates to support the economy. As tax revenues fall, the state budget deficit widens, while spending on unemployment insurance and other social programs rises. Recession Meaning
When was the last recession?
The last US recession was in 2020, at the start of the COVID-19 pandemic. According to the NBER, the two-month decline ended in April 2020 and qualified as a recession because it was deep and pervasive despite its record-short duration. Recession Meaning
How long do recessions last?
The average US recession since 1857 has lasted 17 months, although six recessions since 1980 have lasted less than 10 months.
Bottom Line – The Recession Meaning & Recession Definition
A recession is a significant, widespread, and long-term decline in economic activity. The usual rule of thumb is that two consecutive quarters of negative gross domestic product (GDP) growth indicate a recession, but many use more complex measures to decide whether an economy is in recession.
Unemployment is one of the key features of a recession. As the demand for goods and services falls, companies need fewer workers and may lay off workers to reduce costs. Laid-off employees must reduce their own spending, which in turn hurts demand, which can lead to more layoffs. Recession Meaning
Since the Great Depression, governments around the world have adopted fiscal and monetary policies to prevent a normal recession from worsening. Some are automatic, such as unemployment insurance, which puts money in the pockets of workers who lose their jobs. Other measures require specific measures, such as lowering interest rates to stimulate investment. Recession Meaning
In recent years, recessions have become less frequent and do not last as long.
While there is no single reliable predictor of recession, each of the 10 U.S. recessions since 1955 has been preceded by an inverted yield curve, although not every period of yield curve inversion has been followed by a recession. Recession Meaning