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Recession

Recession


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In economics, a recession is a business cycle contraction, a general slowdown in economic activity over a period of time. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes, business profits and inflation all fall during recessions; while bankruptcies and the unemployment rate rise.

Recessions are generally believed to be caused by a widespread drop in spending. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation

Definition

In a 1975 New York Times article, economic statistician Julius Shiskin suggested several rules of thumb for defining a recession, one of which was "two down quarters of GDP". In time, the other rules of thumb were forgotten, and a recession is now often defined simply as a period when GDP falls (negative real economic growth) for at least two quarters. Some economists prefer a definition of a 1.5% rise in unemployment within 12 months.

In the United States, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions. The NBER defines an economic recession as: "a significant decline in [the] economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales." Almost universally, academics, economists, policy makers, and businesses defer to the determination by the NBER for the precise dating of a recession's onset and end.



 Attributes

A recession has many attributes that can occur simultaneously and includes declines in component measures of economic activity (GDP) such as consumption, investment, government spending, and net export activity. These summary measures reflect underlying drivers such as employment levels and skills, household savings rates, corporate investment decisions, interest rates, demographics, and government policies.

Economist Richard 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. When these relationships become imbalanced, recession can develop within the country or create pressure for recession in another country. Policy responses are often designed to drive the economy back towards this ideal state of balance.

A severe (GDP down by 10%) or prolonged (three or four years) 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.

In the US, V-shaped, or short-and-sharp contractions followed by rapid and sustained recovery, occurred in 1954 and 1990–91; U-shaped (prolonged slump) in 1974-75, and W-shaped, or double-dip recessions in 1949 and 1980-82. Japan’s 1993-94 recession was U-shaped and its 8-out-of-9 quarters of contraction in 1997-99 can be described as L-shaped. Korea, Hong Kong and South-east Asia experienced U-shaped recessions in 1997-98, although Thailand’s eight consecutive quarters of decline should be termed L-shaped

Recessions have psychological and confidence aspects. For example, if the expectation develops that economic activity will slow, firms may decide to reduce employment levels and save money rather than invest. Such expectations can create a self-reinforcing downward cycle, bringing about or worsening a recession.

Balance sheet recession

The bursting of a real estate or financial asset price bubble can cause a recession. For example, economist Richard Koo wrote that Japan's "Great Recession" that began in 1990 was a "balance sheet recession." It was triggered by a collapse in land and stock prices, which caused Japanese firms to become insolvent, meaning their assets were worth less than their liabilities. Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy.

Liquidity trap

A liquidity trap situation can develop in which interest rates reach near zero (ZIRP) yet do not effectively stimulate the economy. In theory, near-zero interest rates should encourage firms and consumers to borrow and spend. However, if too many individuals or corporations focus on saving or paying down debt rather than spending, lower interest rates have less affect on investment and consumption behavior; the lower interest rates are like "pushing on a string." Economist Paul Krugman described the U.S. 2009 recession and Japan's lost decade as liquidity traps. One remedy to a liquidity trap is expanding the money supply via quantitative easing or other techniques in which money is effectively printed to purchase assets, thereby creating inflationary expectations that cause savers to begin spending again. Government stimulus spending and mercantilist policies to stimulate exports and reduce imports are other techniques to stimulate demand. He estimated in March 2010 that developed countries representing 70% of the world's GDP were caught in a liquidity trap.

Predictors

Although there are no completely reliable predictors, the following are regarded to be possible predictors
Inverted yield curve, the model developed by economist Jonathan H. Wright, uses yields on 10-year and three-month Treasury securities as well as the Fed's overnight funds rate. Another model developed by Federal Reserve Bank of New York economists uses only the 10-year/three-month spread. It is, however, not a definite indicator;

The three-month change in the unemployment rate and initial jobless claims.

Lowering of asset prices, such as homes and financial assets, or high personal and corporate debt levels.

Government responses

 Most mainstream economists believe that recessions are caused by inadequate aggregate demand in the economy, and favor the use of expansionary macroeconomic policy during recessions. Strategies favored for moving an economy out of a recession vary depending on which economic school the policymakers follow. Monetarists would favor the use of expansionary monetary policy, while Keynesian economists may advocate increased government spending to spark economic growth. Supply-side economists may suggest tax cuts to promote business capital investment. When interest rates reach the boundary of an interest rate of zero percent conventional monetary policy can no longer be used and government must use other measures to stimulate recovery. Keynesians argue that fiscal policy, tax cuts or increased government spending, will work when monetary policy fails. Spending is more effective because of its larger multiplier but tax cuts take effect faster. If the government does nothing, or not enough, an economy might languish for an extended period as was the case with Japan's "Lost Decade".

Stock market

The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page. (September 2008)

Some recessions have been anticipated by stock market declines. In Stocks for the Long Run, Siegel mentions that since 1948, ten recessions were preceded by a stock market decline, by a lead time of 0 to 13 months (average 5.7 months), while ten stock market declines of greater than 10% in the DJIA were not followed by a recession.

The real-estate market also usually weakens before a recession. However real-estate declines can last much longer than recessions.

Since the business cycle is very hard to predict, Siegel argues that it is not possible to take advantage of economic cycles for timing investments. Even the National Bureau of Economic Research (NBER) takes a few months to determine if a peak or trough has occurred in the US.

During an economic decline, high yield stocks such as fast moving consumer goods, pharmaceuticals, and tobacco tend to hold up better. However when the economy starts to recover and the bottom of the market has passed (sometimes identified on charts as a MACD), growth stocks tend to recover faster. There is significant disagreement about how health care and utilities tend to recover. Diversifying one's portfolio into international stocks may provide some safety; however, economies that are closely correlated with that of the U.S. may also be affected by a recession in the U.S.

There is a view termed the halfway rule according to which investors start discounting an economic recovery about halfway through a recession. In the 16 U.S. recessions since 1919, the average length has been 13 months, although the recent recessions have been shorter. Thus if the 2008 recession followed the average, the downturn in the stock market would have bottomed around November 2008. The actual US stock market bottom of the 2008 recession was in March 2009.

Politics

Generally an administration gets credit or blame for the state of economy during its time. This has caused disagreements about when a recession actually started. In an economic cycle, a downturn can be considered a consequence of an expansion reaching an unsustainable state, and is corrected by a brief decline. Thus it is not easy to isolate the causes of specific phases of the cycle.

The 1981 recession is thought to have been caused by the tight-money policy adopted by Paul Volcker, chairman of the Federal Reserve Board, before Ronald Reagan took office. Reagan supported that policy. Economist Walter Heller, chairman of the Council of Economic Advisers in the 1960s, said that "I call it a Reagan-Volcker-Carter recession. The resulting taming of inflation did, however, set the stage for a robust growth period during Reagan's administration.

Economists usually teach that to some degree recession is unavoidable, and its causes are not well understood. Consequently, modern government administrations attempt to take steps, also not agreed upon, to soften a recession.

Impacts

Unemployment

The full impact of a recession on employment may not be felt for several quarters. Research in Britain shows that low-skilled, low-educated workers and the young are most vulnerable to unemployment in a downturn. After recessions in Britain in the 1980s and 1990s, it took five years for unemployment to fall back to its original levels.

Business

Productivity tends to fall in the early stages of a recession, then rises again as weaker firms close. The variation in profitability between firms rises sharply. Recessions have also provided opportunities for anti-competitive mergers, with a negative impact on the wider economy: the suspension of competition policy in the United States in the 1930s may have extended the Great Depression.

Social effects

The living standards of people dependent on wages and salaries are more affected by recessions than those who rely on fixed incomes or welfare benefits. The loss of a job is known to have a negative impact on the stability of families, and individuals' health and well-being.

 Global

There is no commonly accepted definition of a global recession, although the IMF regards periods when global growth is less than 3% to be global recessions. The IMF estimates that global recessions seem to occur over a cycle lasting between 8 and 10 years. During what the IMF terms the past three global recessions of the last three decades, global per capita output growth was zero or negative.

Economists at the International Monetary Fund (IMF) state that a global recession would take a slowdown in global growth to three percent or less. By this measure, four periods since 1985 qualify: 1990–1993, 1998, 2001–2002 and 2008–2009.

United Kingdom

The most recent recession to affect the United kingdom was the Late-2000s recession
United States

According to economists, since 1854, the U.S. has encountered 32 cycles of expansions and contractions, with an average of 17 months of contraction and 38 months of expansion. However, since 1980 there have been only eight periods of negative economic growth over one fiscal quarter or more, and four periods considered recessions:

July 1981-November 1982: 14 months

July 1990-March 1991: 8 months

March 2001-November 2001: 8 months

December 2007-July 2009: 19 months

For the past three recessions, the NBER decision has approximately conformed with the definition involving two consecutive quarters of decline. While the 2001 recession did not involve two consecutive quarters of decline, it was preceded by two quarters of alternating decline and weak growth.

Late 2000s

Official economic data shows that a substantial number of nations are in recession as of early 2009. The US entered a recession at the end of 2007, and 2008 saw many other nations follow suit.

United States

The United States housing market correction (a possible consequence of United States housing bubble) and subprime mortgage crisis has significantly contributed to a recession.

The 2008/2009 recession is seeing private consumption fall for the first time in nearly 20 years. This indicates the depth and severity of the current recession. With consumer confidence so low, recovery will take a long time. Consumers in the U.S. have been hard hit by the current recession, with the value of their houses dropping and their pension savings decimated on the stock market. Not only have consumers watched their wealth being eroded – they are now fearing for their jobs as unemployment rises.

U.S. employers shed 63,000 jobs in February 2008, the most in five years. Former Federal Reserve chairman Alan Greenspan said on April 6, 2008 that "There is more than a 50 percent chance the United States could go into recession." On October 1, the Bureau of Economic Analysis reported that an additional 156,000 jobs had been lost in September. On April 29, 2008, nine US states were declared by Moody's to be in a recession. In November 2008, employers eliminated 533,000 jobs, the largest single month loss in 34 years. For 2008, an estimated 2.6 million U.S. jobs were eliminated.

The unemployment rate of US grew to 8.5 percent in March 2009, and there have been 5.1 million job losses till March 2009 since the recession began in December 2007. That is about five million more people unemployed compared to just a year ago. This has become largest annual jump in the number of unemployed persons since the 1940’s.

Although the US Economy grew in the first quarter by 1%, by June 2008 some analysts stated that due to a protracted credit crisis and "rampant inflation in commodities such as oil, food and steel", the country was nonetheless in a recession. The third quarter of 2008 brought on a GDP retraction of 0.5% the biggest decline since 2001. The 6.4% decline in spending during Q3 on non-durable goods, like clothing and food, was the largest since 1950.

A Nov 17, 2008 report from the Federal Reserve Bank of Philadelphia based on the survey of 51 forecasters, suggested that the recession started in April 2008 and will last 14 months. They project real GDP declining at an annual rate of 2.9% in the fourth quarter and 1.1% in the first quarter of 2009. These forecasts represent significant downward revisions from the forecasts of three months ago.

A December 1, 2008, report from the National Bureau of Economic Research stated that the U.S. has been in a recession since December 2007 (when economic activity peaked), based on a number of measures including job losses, declines in personal income, and declines in real GDP. By July 2009 a growing number of economists believed that the recession may have ended. The National Bureau of Economic Research will not make this official determination for some time. In the 2001 recession, for example, the recession ended in November 2001, but it was not until July 2003 that the NBER announced its official determination.

Other countries

A few other countries have seen the rate of growth of GDP decrease, generally attributed to reduced liquidity, sector price inflation in food and energy, and the U.S. slowdown. These include the United Kingdom, Ireland, Canada, Japan, China, India, New Zealand and many countries within the EEA. In some, the recession has already been confirmed by experts, while others are still waiting for the fourth quarter GDP growth data to show two consecutive quarters of negative growth. India along with China is experiencing an economic slowdown but not a recession. Also Africa and South Africa are experiencing economic slowdown and global outbreak. Australia avoided a technical recession in 2009, and had positive growth against the overall global economic downturn.

References

1.^ "Recession". Merriam-Webster Online Dictionary. http://www.merriam-webster.com/dictionary/recession. Retrieved 19 November 2008.

2.^ "Recession definition". Encarta World English Dictionary [North American Edition]. Microsoft Corporation. 2007. http://encarta.msn.com/encnet/features/dictionary/DictionaryResults.aspx?refid=1861699686. Retrieved 19 November 2008.

3.^ Shiskin, Julius (1974-12-01). "The Changing Business Cycle". New York Times: p. 222.

4.^ Achuthan, Lakshman; Banerji, Anirvan (2008-05-07). "The risk of redefining recession". CNN. http://money.cnn.com/2008/05/05/news/economy/recession/index.htm.

5.^ "Financial Check Glossary". Bloomberg.com. 2000. http://www.bloomberg.com/invest//glossary/bfglosr.htm. Retrieved 19 November 2008.

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7.^ a b http://clubtroppo.com.au/2008/11/23/what-is-the-difference-between-a-recession-and-a-depression/ "What is the difference between a recession and a depression?" Saul Eslake Nov 2008

8.^ a b "Business Cycle Expansions and Contractions". National Bureau of Economic Research. http://www.nber.org/cycles.html. Retrieved 19 November 2008.

9.^ a b Koo, Richard (2009). The Holy Grail of Macroeconomics-Lessons from Japan's Great Recession. John Wiley & Sons (Asia) Pte. Ltd.. ISBN 978-0470-82494-8.

10.^ http://www.adb.org/Documents/Books/Key_Indicators/2001/default.asp

11.^ Washington Post-Robert Samuelson-Our Economy's Crisis of Confidence-June 14, 2010

12.^ Presentation by Richard Koo-The Age of Balance Sheet Recessions-April 2010

13.^ Krugman, Paul (2009). The Return of Depression Economics and the Crisis of 2008. W.W. Norton Company Limited. ISBN 978-0-393-07101-6.

14.^ Krugman-NYT Blog-How Much of the World is in a Liquidity Trap?

15.^ A Estrella, FS Mishkin (1995). "Predicting U.S. Recessions: Financial Variables as Leading Indicators". MIT Press. http://www.mitpressjournals.org/doi/pdfplus/10.1162/003465398557320?cookieSet=1.

16.^ Grading Bonds on Inverted Curve By Michael Hudson

17.^ Wright, Jonathan H., The Yield Curve and Predicting Recessions (March 2006). FEDs Working Paper No. 2006-7.

18.^ Signal or Noise? Implications of the Term Premium for Recession Forecasting

19.^ Labor Model Predicts Lower Recession Odds

20.^ Leading Economic Indicators Suggest U.S. In Recession January 21, 2008

21.^ Siegel, Jeremy J. (2002). Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, 3rd, New York: McGraw-Hill, 388. ISBN 9780071370486

22.^ "From the subprime to the terrigenous: Recession begins at home". Land Values Research Group. June 2, 2009. http://lvrg.org.au/blog/2009/06/from-subprime-to-terrigenous-recession.html. "A downturn in the property market, especially in turnover (sales) of properties, is a leading indicator of recession, with a lead time of up to 9 quarters..."

23.^ Robert J. Shiller (2009-06-07). "Why Home Prices May Keep Falling". New York Times, June 6, 2009. http://www.nytimes.com/2009/06/07/business/economy/07view.html. Retrieved 2010-04-10.

24.^ Recession Predictions and Investment Decisions by Allan Sloan, December 11, 2007

25.^ Recession? Where to put your money now. Shawn Tully, February 6, 2008

26.^ crossover

27.^ Rethinking Recession-Proof Stocks Joshua Lipton 01.28.08

28.^ Recession Stock Picks Douglas Cohen, January 18, 2008

29.^ http://online.wsj.com/article/SB122635740974515379.html NOVEMBER 11, 2008 Recession Puts Halfway Rule to the Test, By DAVID GAFFEN

30.^ Economy puts Republicans at risk 29 January 2008

31.^ The Bush Recession Prepared by: Democrat staff, Senate Budget Committee, July 31, 2003

32.^ Ready for a Real Downer Monday, Nov. 23, 1981 By GEORGE J. CHURCH

33.^ a b c Vaitilingam, Romesh (17 September 2009). "Recession Britain: New ESRC report on the impact of recession on people's jobs, businesses and daily lives". Economic and Social Research Council. http://www.esrc.ac.uk/ESRCInfoCentre/PO/releases/2009/september/recessionbritain.aspx. Retrieved 22 January 2010.

34.^ The Recession that Almost Was. Kenneth Rogoff, International Monetary Fund, Financial Times, April 5, 2002

35.^ Global Recession Risk Grows as U.S. `Damage' Spreads

36.^ a b http://www.bea.gov/national/xls/gdpchg.xls

37.^ It's official: Recession since Dec. '07

38.^ "BBC News - Business - US economy out of recession". BBC. 29 October 2009. http://news.bbc.co.uk/1/hi/business/8332773.stm. Retrieved 6 February 2010.

39.^ "Determination of the December 2007 Peak in Economic Activity.". NBER Business Cycle Dating Committee. 2008-12-11. http://www.nber.org/cycles/dec2008.pdf. Retrieved 2009-04-26.

40.^ Economic Crisis: When will it End? IBISWorld Recession Briefing " Dr. Richard J. Buczynski and Michael Bright, IBISWorld, January 2009

41.^ [1] Job Loss Predictions

42.^ Recession unlikely if US economy gets through next two crucial months

43.^ Uchitelle, Louis; Andrews, Edmund L.; Labaton, Stephen (2008-12-06). "U.S. Loses 533,000 Jobs in Biggest Drop Since 1974". The New York Times. http://www.nytimes.com/2008/12/06/business/economy/06jobs.html. Retrieved 2010-04-10.

44.^ http://www.statesmanjournal.com/article/20090110/NEWS/901100332

45.^ http://www.wealthalchemist.com/Blog/2009/04/reality-check-job-loss-2009-control

46.^ http://www.bls.gov/news.release/empsit.nr0.htm

47.^ "Worst year for jobs since '45". CNN. 2009-01-09. http://money.cnn.com/2009/01/09/news/economy/jobs_december/index.htm. Retrieved 2010-04-10.

48.^ Real GDP First-Quarter 2008 Preliminary Estimate :: Brent Meyer :: Economic Trends :: 06.03.08 :: Federal Reserve Bank of Cleveland

49.^ Fragile economy improves but not out of woods yet: Financial News - Yahoo! Finance

50.^ Why it's worse than you think, 16 June 2008, Newsweek.

51.^ GROSS DOMESTIC PRODUCT: THIRD QUARTER 2008

52.^ U.S. Economy Contracts Most Since the 2001 Recession

53.^ http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/2008/survq408.cfm?loc=interstitialskip Fourth Quarter 2008 Survey of Professional Forecasters Release Date: November 17, 2008

54.^ http://www.usatoday.com/money/economy/2008-12-01-recession-nber-statement_N.htm Text of the NBER's statement on the recession

55.^ Daniel Gross, The Recession Is... Over?, Newsweek, July 14, 2009.

56.^ V.I. Keilis-Borok et al., Pattern of Macroeconomic Indicators Preceding the End of an American Economic Recession. Journal of Pattern Recognition Research, JPRR Vol.3 (1) 2008.

57.^ 2003 Business Cycle Dating Committee, July 2003, National Bureau of Economic Research

[edit] External links

Business Cycle Expansions and Contractions The National Bureau Of Economic Research

Independent Analysis of Business Cycle Conditions - American Institute for Economic Research (AIER)

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