What Is a Recession?

A recession is a significant and widespread downturn in economic activity that typically lasts for longer than a few months. A common rule of thumb is that two consecutive quarters of shrinkage in gross domestic product (GDP) indicate a recession. However, it's much more complex than that.

Understanding Recessions

Since the Industrial Revolution, most economies have grown steadily, with few economic contractions. However, recessions are still common. Between 1960 and 2007, there were 122 recessions affecting 21 advanced economies, according to the International Monetary Fund (IMF). In r♑ecent years, recessions have become less frequent and shorter in duration.

Declinওes in economic output and employment that recessions cause ca𝓡n become self-perpetuating. For example, declining consumer demand can prompt companies to lay off staff, which affects consumer spending power, and can further weaken consumer demand.

Similarly, the bear markets that often accompany recessions can reverse the wealth effect, suddenly making people less wealthy and further trimming ဣconsumption.

Since the Great Depression, governments around the world have adopted fiscal and monetary policies to prevent a run-of-the-mill recession from becoming far worse. Some of these stabilizing factors are automatic, such as unemployment insurance that puts money into the poᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚckets of employees who lose their jobs. Other measures require specific actions, such as cutting interest rates to stimulate investment.

Economists at the National Bureau of Economic Research (NBER) measure recessions by looking at nonfarm payrolls, industrial production, and retail sales, among other indicators. NBER states that there is "no fixed rule about what measures contribute information to the process or how they are weighted in our decisions."

A downturn must be deep, pervasive, and lasting to qualify as a recession by NBER's definition. Since some of these qualities may not be evident when a downturn first begins, many recessions are called retroactively.

Recessions are most clearly identified after they are over. Additionally, investors, economists, and employees may have ve🌺ry different experiences in terms of when a recession is at its worst.

Equity markets often decline 🌊before an economic downturn, so investors may assume a recession has begun as investment losses accumulat♕e and corporate earnings decline, even if other measures of recession remain healthy, such as consumer spending and unemployment.

Conversely, since 澳洲幸运5官方开奖结果体彩网:unemployment often remains high long after the economy hits bottom, workers may percei🙈ve a recession as conꦺtinuing for months or even years after economic activity recovers.

What Predicts a Recession?

While there is no single, sure-fire predictor of a recession, an inverted yield curve has preceded each of the 10 U.S. recessions since 1955. That being said, not every period of inverted yield curve was followed by a recession.

When the yield curve is normal, short-term yields are lower than long-term yields. This is because longer-term debt has more duration risk. For example, a 10-year bond usually yields more than a 2-year bond, as the investor is taking a risk that future inflation or higher interest rates could lower the bond's value before it can be redeemed. So, in this case, the yield goes up over time, creating an upward yield curve.

The yield curve inverts if yields on longer-dated bonds go down while yields on shorter-term bonds go up. The rise of near-term interest rates can tip the economy into a recession. The reason why the yield on long-term bonds drops below that of short-term൩ bonds is because traders and investors anticipate near-term economic 🎉weakness leading to eventual interest rate cuts.

Investors also look at a variety of leading indicators to predict a recession. These include the ISM Purchasing Managers Index, the 澳洲幸运5官方开奖结果体彩网:Conference Board Lꦺeading Economic Index, and the OECD Composite Leading Indicator.

What Causes Recessions?

Numerous economic theories attempt to explain how and why an econ🤡omy goes into recession. These theories can be broadly categorized as economic, financial, psychological, or a combination of these factors.

Some economists focus on economic changes, including structural shifts in industries, as most important. For example, a sharp and sustained surge in oil prices can raise costs across the economy, triggering other effects that could lead to a recession.

Some theories suggest that financial factors contribute to recessions. These theories focus on credit growth and the accumulation of financial risks during good economic times, the contraction of credit and money supply when recession starts, or both. 澳洲幸运5官方开奖结果体彩网:Monetarism, which says recessions are caused by insufficient growth in the money supply, is an example of this 🅷type of theory.

Other theories focus on psychological factors, such as over-exuberance during economic booms and deep pessimism during downturns, to explain why recessions occur and persist. 澳洲幸运5官方开奖结果体彩网:Keynesian economics focuses on the psychological and economic factors that can reinforce and prolong recessions. The concept of a 澳洲幸运5官方开奖结果体彩网:Minsky Moment, named for economist Hyman Minsky, combines the two to explain how bull-market euphoria can encourage unsustainable specula🌠tion.ꩲ

Recessions and Depressions

According to NBER, the U.S. has experienced 34 recessions since 1854, but only five since 1980. The downturn following the 2008 global finan🐻cial crisis and the double-dip slump🐽s of the early 1980s were the worst since the Great Depression and the 1937-38 recession.

Routine recessions can cause GDP to decline 2%, while severe ones might set an economy back 5%, according to the International Monetary Fund (IMF). A depression is a particularly deep and long-lasting recession, though🀅 th🦩ere is no commonly accepted formula to define one.

During the Great Depression, U.S. economic output fell 33%, stocks plunged 80%, and unemployment hit 25%. During the 1937-38 recession, real GDP fell 10% while unemployment jumped to 20%.

Recent Recessions

The COVID-19 pandemic is a prime example of an 澳洲幸运5官方开奖结果体彩网:economic shock that can trigger a recession. The depth and widespread nature of the economic downturn caused by the COVID-19 pandemic in 2020 led the NBER to designate it a recession.

In 2022, many economic analysts debated whether the U.S. ec🅘onomy was in recession or not, given conflicting economic indic🔯ators.

Analysts with investment advisory firm Raymond James argued in an October 2022 r൩eport that the U.S. economy was not in recession. Despite the fact that the economy experienced two consecutive quarters of shrinkage, numerous other positive economic indicators showed that the economy was not in recession, the report argued.

It cited the fact that employment continued to increase even as GDP contracted. The report further pointed out that although real personal disposable income declined in 2022, much of the decline was a result of the end of the COVID-19 relief stimulus, and that personal income, excluding these payments, continued to rise.

Data from the Federal Reserve Bank of St. Louis, as of late October 2022, similarly showed that key NBER indicators did not indicate a recession in the U.S. economy.

The Bottom Line

A recession is a significant, widespread, and prolonged downturn in economic activity. Rece🐓ssions are commonly characterized by two consecutive quarters of negative gross domestic product (GDP) growth, though there are more complex ways to assess and classify downturns.

The unemployment rate is a key recession indicator. As demand for goods and services falls, companies need fewer workers and may lay off staff to cut costs. Laid-off staff then have to cut their own spending, which in turn hurts demand, which can lead 🔥to more layoffs.

Since the Great Depression, governments arou🔥nd the world have adopted fiscal and monetary policies to prevent recessions from deepening into depressions, suchไ as unemployment insurance and cutting interest rates.