recession fears, economic affairs

What Is A Recession?

Official Recession Definition

During a recession, the economy struggles, people lose work, companies make much less sales and the country’s overall economic output declines. The point where the economy officially falls into a recession depends on a variety of technical factors. Let’s dive in! This definition of a recession became a common standard after economist Julius Shiskin came up with a few rules of thumb to define an actual recession. However, ignorance about recessions has taken hold because of the simplistic idea that a recession is two successive quarterly declines in gross domestic product (GDP), a measure of the nation’s output.
This vaque idea originated in a 1974 New York Times article by Julius Shiskin, who provided a list of recession-spotting rules, including the common two consecutive down quarters of GDP. Over the years the rest of his rules somehow dropped away, leaving behind only “two down quarters of GDP.”

The idea failed in the 2001 recession, for example. At the time and until July 2002, data showed just one down quarter of GDP, leading policy makers to claim there had been no recession. Yet, later that month, revisions showed GDP was down for three consecutive quarters. Complicating matters further, with the benefit of time, we now know that GDP actually flucuated between negative and positive readings, never showing two negative quarters in a row. 

The far bigger issue in 2001 was the loss of 2.7 million jobs. The job losses were greater than in most recessions over the past 50 years.
However, the National Bureau of Economic Research (NBER), which officially declares recessions, says the two consecutive quarters of decline in real GDP are not how it is defined anymore. The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Prominent economist Geoffrey Moore wrote essays at the NBER, where he directed the business cycle research program for many years. The following topics are discussed in depth: Conditions that determine when a recession begins and ends, and how to get some advance warning of these events both in the United States and in other countries. The essays are of particular importance because of the wide use that is made of the NBER’s chronology of these events in government publications and by private analysts. If you’re interested in learning more about this topic in greater depth, you can purchase the book “Business Cycles, Inflation & Forecasting” on Amazon 

Key TakeAways

  • A variety of economic theories have been developed to explain how and why recessions occur.
  • Investors, businesses and government officials track numerous economic indicators that can help predict or confirm the onset of recessions, but they’re officially declared by the NBER.
  • A recession is visible when industrial production, employment, real income, and wholesale-retail trade is in a significant period of decline typically lasting for several months. 
History shows the long-term macroeconomic trend in most countries has been economic growth. Along with this long-term growth, however, we have seen short-term fluctuations when major macroeconomic indicators have slowed down or even significantly declined over a prolonged period of time, time frames of six months up to several years, before returning to their long-term economic growth trend. These short-term declines are known as recessions.

Disclaimer: This content is only intended for informational purposes. Before making any investment, you should always do your own research and analysis.

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