Recession
In economics, a recession is a business cycle contraction that occurs when there is a period of broad decline in economic activity. Recessions generally occur when there is a widespread drop in spending. This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or a large-scale anthropogenic or natural disaster. There is no official definition of a recession, according to the International Monetary Fund.
In the United States, a recession is defined as "a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." The European Union has adopted a similar definition. In the United Kingdom and Canada, a recession is defined as negative economic growth for two consecutive quarters.
Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply and decreasing interest rates or increasing government spending and decreasing taxation.
Definitions
In a 1974 article by The New York Times, Commissioner of the Bureau of Labor Statistics Julius Shiskin suggested that a rough translation of the bureau's qualitative definition of a recession into a quantitative one that almost anyone can use might run like this:- In terms of duration – Declines in real gross national income for two consecutive quarters; a decline in industrial production over a six-month period.
- In terms of depth – A 1.5% decline in real gross national income; a 15% decline in non-agricultural employment; a two-point rise in unemployment to a level of at least 6%.
- In terms of financial indicators - A significant increase in loan defaults or a tightening of credit conditions by financial institutions, leading to a decrease in business investment and consumer spending.
- In terms of diffusion – A decline in non-agricultural employment in more than 75% of industries, as measured over six-month spans, for six months or longer.
In the United States, the Business Cycle Dating Committee of the National Bureau of Economic Research 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 income, employment, industrial production, and wholesale-retail sales". The NBER also explains that: "a recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough." The NBER is considered the official arbiter of recession start and end dates for the United States. The Bureau of Economic Analysis, an independent federal agency that provides official macroeconomic and industry statistics, says "the often-cited identification of a recession with two consecutive quarters of negative GDP growth is not an official designation" and that instead, "The designation of a recession is the province of a committee of experts at the National Bureau of Economic Research".
The European Union, akin to the NBER's methodology, has embraced a definition of recession that integrates GDP alongside a spectrum of macroeconomic indicators, including employment and various other metrics. This approach allows for a comprehensive assessment of the depth and breadth of economic downturns, enabling policymakers to devise more effective strategies for economic stabilization and recovery.
Recessions in the United Kingdom are generally defined as two consecutive quarters of negative economic growth, as measured by the seasonally adjusted quarter-on-quarter figures for real GDP.
The Organisation for Economic Co-operation and Development, an intergovernmental organization, defines a recession as a period of at least two years during which the cumulative output gap reaches at least 2% of GDP, and the output gap is at least 1% for at least one year.
GDP per capita recession refers to the decline of GDP per capita instead of decline of total GDP.
Attributes
A recession encompasses multiple attributes that often occur simultaneously and encompasses declines in component measures of economic activity, such as GDP, including consumption, investment, government spending, and net export activity. These summary measures are indicative of underlying drivers such as employment levels and skills, household savings rates, corporate investment decisions, interest rates, demographics, and government policies. By examining these factors comprehensively, economists gain insights into the complex dynamics that contribute to economic downturns and can formulate effective strategies for mitigating their impact.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 as net borrowers, with the government budget nearly balanced and net exports near zero.
A severe or prolonged recession is referred to as an economic depression, although some argue that their causes and cures can be different. As an informal shorthand, economists sometimes refer to different recession shapes, such as V-shaped, U-shaped, 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 1990–1991; U-shaped in 1974–1975, and W-shaped, or double-dip recessions in 1949 and 1980–1982. Japan's 1993–1994 recession was U-shaped and its 8-out-of-9 quarters of contraction in 1997–1999 can be described as L-shaped. Korea, Hong Kong and South-east Asia experienced U-shaped recessions in 1997–1998, although Thailand's eight consecutive quarters of decline should be termed L-shaped.Front end of a recession
Describes the early stages of an economic downturn with emerging negative trends across key economic sectors before a full-blown deepening recession is officially declared. Characteristics: Indicators like GDP growth, employment rates, and consumer spending start to decline. A decline in overall demand causes a slowdown in economic activity. Falling consumer confidence, falling retail sales and reduced business investment are common signs that indicate the beginning of a recession. This phase of the economic cycle can also be marked by slowing economic growth with factors like declining corporate profit margins, weakening business investment, falling industrial production and a deteriorating sluggish labor market, slower payroll growth, wage stagnation or decline and a housing market slowdown as real estate buyers in the housing sector become more cautious. In financial markets some investors may become more risk-averse and bond yields may rise thereby making it more expensive for companies to borrow money, causing some businesses to struggle to meet their financial obligations.Summary: The front end of a recession refers to the initial phase or onset of a recession. It typically is a period of increasing economic stress, significant uncertainty and precedes the official recognition of a recession, signaling that the economy is transitioning toward contraction, even before the full effects are felt or officially declared. Early warning indicators can be rising inflation, widening credit spreads, rising credit delinquencies and an inverted yield curve. Recessions especially in the U.S. are typically "preceded by a rising debt service ratio for the private sector". Some economists also consider a rising 3-month average unemployment rate above the prior year's average as an early recession signal that can precede a formal recession declaration. The Conference Board's Leading Economic Index can also provide an early recession indication. Other "soft" consumer signals also tend to appear in everyday life before official statistics catch up, like slower travel. More early warning indicators can be found in the section "Predictors" [|Recession#Predictors]. Identifying the front end of a recession is crucial for policymakers as it gives more room to act early and thereby allows for early intervention to potentially mitigate the impact of a recession before the downturn deepens.
The table below illustrates the progression toward recession. Each column represents a distinct phase in the economic cycle.
| Normal Economy | Early Warning Signs / Front End Indicators | Recession Threshold / Severe Downturn |
| Average to Strong Growth | Slowing Growth | No Growth |
| Average to High Confidence | Declining Confidence / Increased Uncertainty | Low Confidence / High Uncertainty |
| Average to High Business Investment | Falling Business Investment | No Business Investment |
| Low to Average Unemployment | Growing Unemployment | High Unemployment |
| Stable to Growing Home Prices | Falling Home Prices | Low Home Prices |
| Stable to Low Food Prices | Growing Food Prices | High Food Prices |
| Low Corporate & Household Debt | Growing Corporate & Household Debt | High Corporate & Household Debt |
| Stable to High Consumer Spending | Decreasing Consumer Spending | Low Consumer Spending |