In economics, a recession is a business cycle contraction when there
is a general decline in economic activity.
Recessions generally occur when there is a widespread drop in spending
(an adverse demand shock). This may be triggered by various events,
such as a financial crisis, an external trade shock, an adverse supply
shock or the bursting of an economic bubble. In the United States, it
is defined 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". In the United Kingdom, it is
defined as a negative economic growth for two consecutive
Governments usually respond to recessions by adopting expansionary
macroeconomic policies, such as increasing money supply, increasing
government spending and decreasing taxation.
2.1 Type of recession or shape
Balance sheet recession
2.4 Liquidity trap
2.5 Paradoxes of thrift and deleveraging
4 Government responses
5 Stock market
7.3 Social effects
8.3 United Kingdom
8.4 United States
8.5 Late 2000s
8.5.1 United States
9 See also
11 External links
In a 1974
The New York Times
The New York Times article, Commissioner of the Bureau of
Labor Statistics Julius Shiskin suggested several rules of thumb for
defining a recession, one of which was two consecutive quarters of
GDP growth. In time, the other rules of thumb were
forgotten. Some economists prefer a definition of a 1.5-2 percentage
points 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, 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". Almost universally, academics, economists, policy
makers, and businesses refer to the determination by the NBER for the
precise dating of a recession's onset and end.
In the United Kingdom, recessions are generally defined as two
consecutive quarters of negative economic growth, as measured by the
seasonal adjusted quarter-on-quarter figures for real
GDP, with the same definition being used for all
other member states of the European Union.
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
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.
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.
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 1990–91; 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
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
companies expect economic activity to slow, they may reduce employment
levels and save money rather than invest. Such expectations can create
a self-reinforcing downward cycle, bringing about or worsening a
Consumer confidence is one measure used to
evaluate economic sentiment. The term animal spirits has
been used to describe the psychological factors underlying economic
Robert J. Shiller
Robert J. Shiller wrote that the term "...refers
also to the sense of trust we have in each other, our sense of
fairness in economic dealings, and our sense of the extent of
corruption and bad faith. When animal spirits are on ebb, consumers do
not want to spend and businesses do not want to make capital
expenditures or hire people."
Balance sheet recession
Balance sheet recession
High levels of indebtedness or the bursting of a real estate or
financial asset price bubble can cause what is called a "balance sheet
recession". This is when large numbers of consumers or corporations
pay down debt (i.e., save) rather than spend or invest, which slows
the economy. The term balance sheet derives from an accounting
identity that holds that assets must always equal the sum of
liabilities plus equity. If asset prices fall below the value of the
debt incurred to purchase them, then the equity must be negative,
meaning the consumer or corporation is insolvent.
Krugman wrote in 2014 that "the best working hypothesis seems to be
that the financial crisis was only one manifestation of a broader
problem of excessive debt—that it was a so-called "balance sheet
recession". In Krugman's view, such crises require debt reduction
strategies combined with higher government spending to offset declines
from the private sector as it pays down its debt.
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 have negative equity, 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
GDP declines by the amount of debt repayment and
un-borrowed individual savings, leaving government stimulus spending
as the primary remedy.
Krugman discussed the balance sheet recession concept during 2010,
agreeing with Koo's situation assessment and view that sustained
deficit spending when faced with a balance sheet recession would be
appropriate. However, Krugman argued that monetary policy could also
affect savings behavior, as inflation or credible promises of future
inflation (generating negative real interest rates) would encourage
less savings. In other words, people would tend to spend more rather
than save if they believe inflation is on the horizon. In more
technical terms, Krugman argues that the private sector savings curve
is elastic even during a balance sheet recession (responsive to
changes in real interest rates) disagreeing with Koo's view that it is
inelastic (non-responsive to changes in real interest
A July 2012 survey of balance sheet recession research reported that
consumer demand and employment are affected by household leverage
levels. Both durable and non-durable goods consumption declined as
households moved from low to high leverage with the decline in
property values experienced during the subprime mortgage crisis.
Further, reduced consumption due to higher household leverage can
account for a significant decline in employment levels. Policies that
help reduce mortgage debt or household leverage could therefore have
A liquidity trap is a
Keynesian theory that a situation can develop in
which interest rates reach near zero (zero interest-rate policy) 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 effect 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.
Paradoxes of thrift and deleveraging
Behavior that may be optimal for an individual (e.g., saving more
during adverse economic conditions) can be detrimental if too many
individuals pursue the same behavior, as ultimately one person's
consumption is another person's income. Too many consumers attempting
to save (or pay down debt) simultaneously is called the paradox of
thrift and can cause or deepen a recession.
Economist Hyman Minsky
also described a "paradox of deleveraging" as financial institutions
that have too much leverage (debt relative to equity) cannot all
de-leverage simultaneously without significant declines in the value
of their assets.
During April 2009, U.S. Federal Reserve Vice Chair Janet Yellen
discussed these paradoxes: "Once this massive credit crunch hit, it
didn’t take long before we were in a recession. The recession, in
turn, deepened the credit crunch as demand and employment fell, and
credit losses of financial institutions surged. Indeed, we have been
in the grips of precisely this adverse feedback loop for more than a
year. A process of balance sheet deleveraging has spread to nearly
every corner of the economy. Consumers are pulling back on purchases,
especially on durable goods, to build their savings. Businesses are
cancelling planned investments and laying off workers to preserve
cash. And, financial institutions are shrinking assets to bolster
capital and improve their chances of weathering the current storm.
Once again, Minsky understood this dynamic. He spoke of the paradox of
deleveraging, in which precautions that may be smart for individuals
and firms—and indeed essential to return the economy to a normal
state—nevertheless magnify the distress of the economy as a
There are no known completely reliable predictors, but the following
are considered 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
The three-month change in the unemployment rate and initial jobless
Index of Leading (Economic) Indicators (includes some of the above
Lowering of asset prices, such as homes and financial assets, or high
personal and corporate debt levels.
Prakash Loungani of the
International Monetary Fund
International Monetary Fund found
that only two of the sixty recessions around the world during the
1990s had been predicted by a consensus of economists one year
earlier, while there were zero consensus predictions one year earlier
for the 49 recessions during 2009.
See also: Stabilization policy
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
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 (zero interest-rate policy) 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—works when
monetary policy fails. Spending is more effective because of its
larger multiplier but tax cuts take effect faster.
Paul Krugman wrote in December 2010 that significant,
sustained government spending was necessary because indebted
households were paying down debts and unable to carry the U.S. economy
as they had previously: "The root of our current troubles lies in the
debt American families ran up during the Bush-era housing
bubble...highly indebted Americans not only can’t spend the way they
used to, they’re having to pay down the debts they ran up in the
bubble years. This would be fine if someone else were taking up the
slack. But what’s actually happening is that some people are
spending much less while nobody is spending more — and this
translates into a depressed economy and high unemployment. What the
government should be doing in this situation is spending more while
the private sector is spending less, supporting employment while those
debts are paid down. And this government spending needs to be
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
Dow Jones Industrial Average
Dow Jones Industrial Average 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
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, 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 had 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.
Generally an administration gets credit or blame for the state of
economy during its time. This has caused disagreements
about on how it 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,
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[citation
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.
Unemployment is particularly high during a recession. Many economists
working within the neoclassical paradigm argue that there is a natural
rate of unemployment which, when subtracted from the actual rate of
unemployment, can be used to calculate the negative
GDP gap during a
recession. In other words, unemployment never reaches 0 percent, and
thus is not a negative indicator of the health of an economy unless
above the "natural rate," in which case it corresponds directly to a
loss in gross domestic product, or GDP.
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. Many companies often expect
employment discrimination claims to rise during a
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
The living standards of people dependent on wages and salaries are not
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.
Fixed income benefits receive small cuts which make it tougher to
Main article: Global recession
According to the
International Monetary Fund
International Monetary Fund (IMF), "Global recessions
seem to occur over a cycle lasting between eight and 10
years." The IMF takes many factors into account when
defining a global recession. Until April 2009, IMF several times
communicated to the press, that a global annual real
GDP growth of 3.0
percent or less in their view was "...equivalent to a global
By this measure, six periods since 1970 qualify:
2001–2002, and 2008–2009.
During what IMF in April 2002 termed the past three global recessions
of the last three decades, global per capita output growth was zero or
negative, and IMF argued—at that time—that because of the opposite
being found for 2001, the economic state in this year by itself did
not qualify as a global recession.
In April 2009, IMF had changed their
Global recession definition to:
A decline in annual per‑capita real World
GDP (purchasing power
parity weighted), backed up by a decline or worsening for one or more
of the seven other global macroeconomic indicators: Industrial
production, trade, capital flows, oil consumption, unemployment rate,
per‑capita investment, and per‑capita
By this new definition, a total of four global recessions took place
since World War II: 1975, 1982, 1991 and 2009. All of them only lasted
one year, although the third would have lasted three years (1991–93)
if IMF as criteria had used the normal exchange rate weighted
per‑capita real World
GDP rather than the purchase power parity
weighted per‑capita real World GDP.
The worst recession Australia has ever suffered happened in the
beginning of the 1930s. As a result of late 1920s profit issues in
agriculture and cutbacks, 1931-1932 saw Australia’s biggest
recession in its entire history. It fared better than other nations,
that underwent depressions, but their poor economic states influenced
Australia’s as well, that depended on them for export, as well as
foreign investments. The nation also benefited from bigger
productivity in manufacturing, facilitated by trade protection, which
also helped with feeling the effects less.
Due to a credit squeeze, the economy had gone into a brief recession
Australia was facing a rising level of inflation in 1973, caused
partially by the oil crisis happening in that same year, which brought
inflation at a 13% increase. Economic recession hit by the middle of
the year 1974, with no change in policy enacted by the government as a
measure to counter the economic situation of the country.
Consequently, the unemployment level rose and the trade deficit
Another recession – the most recent one to date – came in the
1990s, at the beginning of the decade. It was the result of a major
stock collapse in 1987, in October, referred to now as
Black Monday. Although the collapse was larger than the one in 1929,
the global economy recovered quickly, but North America still suffered
a decline in lumbering savings and loans, which led to a crisis. The
recession wasn’t limited to only America, but it also affected
partnering nations, such as Australia. The unemployment level
increased to 10.8%, employment declined by 3.4% and the
decreased as much as 1.7%. Inflation, however, was successfully
Main article: List of recessions in the United Kingdom
The most recent recession to affect the
United Kingdom was the
Main article: List of recessions in the 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
July 1981 – November 1982: 15 months
July 1990 – March 1991: 8 months
March 2001 – November 2001: 8 months
December 2007 – June 2009: 18 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.
Main article: Great Recession
Official economic data shows that a substantial number of nations were
in recession as of early 2009. The US entered a recession at the end
of 2007, and 2008 saw many other nations follow suit. The
US recession of 2007 ended in June 2009 as the nation
entered the current economic recovery.
United States housing market correction (a consequence of the
United States housing bubble) and subprime mortgage crisis
significantly contributed to a recession.
The 2007–2009 recession saw private consumption fall for the first
time in nearly 20 years. This indicated the depth and severity of the
recession. With consumer confidence so low, economic recovery took a
long time. Consumers in the U.S. were hit hard by the Great Recession,
with the value of their houses dropping and their pension savings
decimated on the stock market.
U.S. employers shed 63,000 jobs in February 2008, the most
in five years. Former Federal Reserve chairman Alan Greenspan said on
6 April 2008 that "There is more than a 50 percent chance the United
States could go into recession." On 1 October, the Bureau
of Economic Analysis reported that an additional 156,000 jobs had been
lost in September. On 29 April 2008,
Moody's declared that nine US
states were in a recession. In November 2008, employers eliminated
533,000 jobs, the largest single-month loss in 34 years.
In 2008, an estimated 2.6 million U.S. jobs were
The unemployment rate in the U.S. grew to 8.5 percent in March 2009,
and there were 5.1 million job losses by March 2009 since the
recession began in December 2007. That was about five
million more people unemployed compared to just a year
prior, which was the largest annual jump in the number of
unemployed persons since the 1940s.
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 17 November 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 would 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
A 1 December 2008 report from the National Bureau of Economic Research
stated that the U.S. had 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 announced on 20 September 2010
that the 2008/2009 recession ended in June 2009, making it the longest
recession since World War II.
Flooding the market
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Library resources about
Resources in your library
Moore, Geoffrey H. (2002). "Recessions". In
David R. Henderson
David R. Henderson (ed.).
Concise Encyclopedia of
Economics (1st ed.). Library of
Liberty. OCLC 317650570, 50016270, 163149563
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