Recession

A recession is an economic condition that denotes a decline in activity during a prolonged period of time. A true recessionary period is marked by a downturn that lasts more than a few months. Several factors typically point to a recession, including a decline in employment hiring, an acceleration in mass layoffs, a drop in the level of industrial production, and a decline in the trading of imports and exports. In its most technical sense, economists define a recession as a period when more than two consecutive quarters of negative economic growth have occurred, as measured by a country’s gross domestic product (GDP). A particularly severe or lengthy recession may be categorized as an economic depression, although differing opinions exist among economists as to the exact conditions that must be met to classify a recession as a depression.

The U.S.-based nonprofit National Bureau of Economic Research (NBER) is a prominent organization that studies economic activity and decides whether the United States is in the midst of a recession. The NBER uses economic research and shares its findings with business professionals, members of the academic community, and public policymakers. In September 2010, the NBER’s Business Cycle Dating Committee stated that it examines different measures of broad economic activity including real GDP based on products and income, employment across the economy, and real income, as well as more specific economic indicators such as real sales and the Federal Reserve’s industrial production index.

Background

Recessions are a common part of economic cycles within industrialized nations. While there are fluctuations, recessions traditionally last anywhere from six to eighteen months. By contrast, a global recession can last much longer—anywhere from eight to ten years, according to the International Monetary Fund (IMF). A variety of factors can trigger a recession, including singular events. An example is the housing crisis and subsequent credit crunch that began in 2007 and triggered the onset of a global recession known as the Great Recession. In this instance, several factors contributed to the recession, including unsound investment strategies. In 2009, the IMF’s Stijn Claessens and M. Ayhan Kose stated that advanced economies endured synchronized recessions in the mid-1970s, early 1980s, early 1990s, and early 2000s. The onset of the global COVID-19 pandemic in late 2019 and early 2020 led to the worst global recession since the Great Depression of the 1920s and 1930s, with many economies experiencing high unemployment and economic contraction.

Individual countries can also enter recession. From the 1850s to 2009, some economists assert the United States incurred thirty-two different recessionary cycles—the direct result of different periods of expansion and contraction within the overall national economy. The U.S. economy experienced a long period of economic growth after 2009 as it recovered from the Great Recession, but experienced a sharp downtown in 2020 following the onset of the COVID-19 pandemic.

Results in other developed countries have varied, and some are closely tied to the United States. For example, in Europe, several countries experienced decreased GDP rates alongside the United States during the 2007 economic downturn. Other countries—including Australia, China, and India—nevertheless continued to have positive growth during this period of time within their own national economies.

While there are no hard-and-fast rules to determine a recession, economists over time have relied upon a series of indicators that have a common correlation from one year to the next. For example, in 2006 economist Jonathan H. Wright published a paper about a system known as the “inverted yield curve” that uses yields on a ten-year period and weighs them against the Treasury’s securities and a central government’s overnight funds rate during a three-month period of time. The Federal Reserve Bank of New York also has developed a model that examines unemployment rates and initial jobless claims during a three-month period of time.

Overview

While the reasons behind a recession can be complex, many economists point to an inadequate level of aggregate demand in the economy. To mitigate the low levels of demand, some economists have suggested that lawmakers and others of influence make policy decisions, though there are different schools of thought regarding the best ways to spur economic growth through government policies. Keynesian economists—theorists who follow the principles first developed by influential British economist John Maynard Keynes—traditionally advocate toward increasing government spending to induce growth in the economy. On the other end of the spectrum, monetarists traditionally advocate tax cuts and promoting capital investment into businesses.

When a recession hits, there are a number of consequences, the most prominent being higher than normal levels of unemployment. When a true recession hits, the full impact may not strike instantly, but may be felt for several quarters afterward. In modern studies, economists point out it took many developed countries up to five years to reach pre-recessionary employment levels once GDP growth began anew.

Other negative consequences from a recession include a drop in productivity from businesses, which tend to invest less and save more money for unanticipated occurrences. This is because profits typically fall, and levels of profitability sometimes can drop by large percentages. Anticompetitive mergers also have been known to spring up during a recession, and these have led to negative economic consequences. From a sociological perspective, a recession can cause widespread problems for people, particularly those heavily dependent upon bringing in a regular wage. Unemployment or underemployment can have rippling negative impacts on families and individual health.

While the government holds a certain level of influence, there are limitations in the types of steps it can take toward mitigating a recession. For example, when interest rates approach 0 percent, monetary policy decisions can no longer be used and other steps need to be taken to stimulate the economy. Other possible steps include increasing government spending and inducing tax cuts.

The stock market has played an important role in the levels of a recession. In the years between the Great Depression and the Great Recession, there were eleven recessions, and each instance was preceded by a decline in the stock market. Economists also point out the real estate market traditionally contracts before the full onset of a recession.

Bibliography

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Gopinath, Gita. “The Great Lockdown: Worst Economic Downturn Since the Great Depression.” IMF Blog, International Monetary Fund, 14 Apr. 2020, blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/. Accessed 5 Dec. 2024.

Huddleston, Tom Jr. “How Many Recessions You’ve Actually Lived through and What Happened in Every One.” CNBC, 9 Apr. 2020, www.cnbc.com/2020/04/09/what-happened-in-every-us-recession-since-the-great-depression.html. Accessed 5 Dec. 2024.

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