What is a recession?

Definition:

A recession is a significant decline in economic activity that lasts for more than a few months. It occurs when there is a decrease in five key economic indicators: real GDP, income, employment, manufacturing, and retail sales.

How does a recession work?

A recession is a decline in the economic output of the economy accompanied by a decrease in income and employment. The National Bureau of Economic Research (NBER) defines a recession in the United States to determine its position in the business cycle. The NBER uses several economic indicators in addition to real GDP to determine when a recession begins.

Economic indicators of recession

The most important indicator of a recession is real GDP. Real GDP is a measure of all that businesses and individuals produce in the United States. It is called “real” because the effects of inflation are removed.

When the growth rate of real GDP turns negative for the first time, it may indicate that there is a recession, but sometimes growth can be negative and then turn positive in the next quarter. Additionally, the Bureau of Economic Analysis may adjust its GDP estimate in its next report, making it difficult to determine if you are in a recession based solely on GDP.

It is worth noting that the stock market is not an indicator of recession. However, a stock market crash can lead to a recession because many investors lose confidence in the economy.

For this reason, the NBER measures the following monthly statistics. These estimates provide a more accurate picture of economic growth. When these economic indicators decline, real GDP will also decline. These are the indicators to watch if you want to know whether the economy is in a recession:

• Real income: measures personal income adjusted for inflation. Cash payments, such as Social Security and welfare payments, are removed. When real income declines, consumer demand and purchases decline.
• Employment: the employment rate and real income inform committees about the overall health of the economy.
• Manufacturing: committees look at the health of the manufacturing sector, as measured by the Industrial Production Report.
• Retail sales, adjusted for inflation: inform committees how companies are responding to consumer demand.
• Real GDP: the NBER also looks at monthly GDP estimates provided by economists such as Macroeconomic Advisers.

Overall, manufacturing jobs are often one of the first signs of a recession beginning. Manufacturers receive large orders months in advance. If these orders begin to decline over time, employment in factories will also decrease. When manufacturers stop hiring, other sectors of the economy begin to slow down as well.

Typically, a decrease in consumer demand is the reason for slower growth. As sales decline, businesses stop expanding. Shortly thereafter, they stop hiring new workers. At that point, the recession has begun.

Example of a recession

The Great Recession began in 2008 but started in 2006 when housing prices began to decline. Poor lending practices, mortgage-backed derivatives, U.S. regulation, and the interconnected global financial system played a role in creating the financial crisis and recession years before the economy collapsed.

Recession vs. Depression

In a recession, the economy contracts for two quarters or more. A depression lasts for several years. The unemployment rate tends to be lower during a recession. For example, unemployment rates rose to 10.0% during the Great Recession and 14.7% during the 2020 recession. During the Great Depression, which lasted from 1929 to 1939, the unemployment rate peaked at 25.59% in 1933.

A recession can turn into a depression if it lasts long enough. However, there is no specific time period that a recession must last or specific conditions that must be met to recognize a depression. Instead, it is an exaggerated and prolonged contraction of one or more economies – you will also know you are in a depression because you will have been experiencing a recession for a long time.

Questions

Repeated (Code)

What happens in a recession?

Generally, during a recession, GDP and manufacturing will decline, consumer spending will decrease, new construction will slow down, and unemployment rates will rise.

What is a recession in simple terms?

A recession is a prolonged period of economic contraction, although there is ongoing debate about the precise definition.

Source: https://www.thebalancemoney.com:443/what-is-a-recession-3306019