What Exactly Is a Recession?

We’re hearing a whole lot of talk about recessions lately, but the so-called experts are divided on whether the US is actually in a recession or just a short-lived economic slowdown, or "trough." The unemployment jump I reported earlier this week is probably going to push some other folks into the pro-recession camp, but there are other driving factors in declaring a recession.

A 1992 Time Magazine article about economic issues in Japan defined a recession as "at least two consecutive quarters of negative growth." The HowStuffWorks.com article "How Recessions Work" says (bolding mine),

When the nation is in the early part of a recession, nobody knows for sure if it is actually a recession or not. The economy might turn around the next day, which would mean the contraction was just a temporary decrease in activity along a mostly upward track. Economists don’t know if the economy is in recession until they can gather data over an extended period of time — typically six months or more.

There is no strict definition for recession. Different people consider different factors when making the assessment.

Some economists and journalists define a recession as two consecutive quarters (three-month financial periods in the year) in which the gross domestic product (GDP) decreases. The GDP is the value of all the reported goods and services produced by people and institutions operating in a country. An overall decrease in the value of goods and services indicates that demand has decreased in most markets. If this is the case, it’s a good bet that companies have laid people off, so unemployment is up. Usually the stock market is also in bad shape when overall value is decreasing. In general, the GDP is a pretty good indicator of the overall state of the economy.

But the economists who officially designate a recession in the United States do not rely on the GDP alone. By general agreement, the official determination of recession is left to the Business Cycle Dating Committee at the National Bureau of Economic Research (NBER).

"How Recessions Work" also points out that there’s a steady cycle of 6-10 years of American economic growth followed by 6-24 months of recession. In other words, we have history of economic peaks and valleys here in the US, which also makes it hard to know for sure exactly when a recession begins.

The NBER offers this description (source):

A recession is 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. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

The current maybe-recession certainly won’t be the first in US history. NBER lists 32 economic cycles from 1854 to 2001. And here’s a list of offical US recessions that includes their timing, duration, and causes.

So, in simple terms, a recession is a brief period of economic hardship. It may include the following effects:

• Bankruptcies
• Banks lending less money
• Deflation
• Foreclosures
• Reduced sales
• Stock market downturn
• Unemployment

The important thing to remember about a recession, and what some are calling the economic crisis of 2008, is that it’s just temporary, and it is a normal part of the economic cycle, however inconvenient and potentially scary. Once prices decrease out of necessity (deflation), people will start buying more again, there will be a greater demand for products and services that will lead to new jobs and less unemployment, and things will pick back up again.

Still have questions? Leave a comment and I’ll help you find the information you need.

Contents © Copyright 2008 Kristen King

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