What is a Recession?


OK, let us cover the basics in this examination of the causes and meanings of an economic recession. To put this idea in very simple terms a recession is a period of negative economic growth for 2 or more quarters in a row. The severity of a recession is measured by its length and the impact on economic growth. 

A severe recession is marked by a significant decline in growth, generally more than 3% in a quarter and that lasts more than 3 quarters. A depression is a more significant breakdown of economic growth marked by negative growth of more than 10% in a quarter. Some quarters in the Great Depression were marked by drops of greater than 25%. Depression is also generally marked by other economic breakdowns such as hyperinflation.

The actually existence of a recessionary economy isn’t known until after the fact. That is why it is important to observe certain bellwether indicators that you can use to detect the possible recession. These indicators include housing statistics, raw material orders, employment numbers, consumer confidence, institutional investor and venture capital cautionary behavior and a few others. When these go into a decline this can indicate a recession is on the horizon.  

The reasons behind economic downturns can be quite variable. For example, bubbles in the economy such as the dotcom bubble in 2001 and the housing bubble in now in 2007-2008 are a common cause of mild recessions. More severe economic recessions are caused by such bubbles occurring in conjunction with other economic problems such as inflation or an oil crisis, such as we have now in 2008. That is why I believe we are currently facing a severe recession.

As we go deeper into this recession we will see the following occur:

  • Interest rates will increase
  • Consumer confidence will decline
  • Firms will lay off workers
  • Productivity and output will decline

These trends, unless dealt with, will feed on each other and cause a greater decline. I think that we will see this happen in 2008 because of the lack of a meaningful economic stimulus due to the election year and the presence of inflation due to artificially low interest rates and high oil prices.

This entry was posted on Thursday, November 23rd, 2017 at 8:43 pm and is filed under Recession. You can follow any responses to this entry through the RSS 2.0 feed.

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