Recession

From Wikipedia, the free encyclopedia

Jump to: navigation, search

This article is about a general slowdown in economic activity. For other uses, see Recession
(disambiguation).

In economics, a recession is a general slowdown in economic activity over a long period of

time, or a business cycle contraction.[1][2] 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; bankruptcies and the unemployment rate rises.

Governments usually respond to recessions by adopting expansionary macroeconomic

policies, such as increasing money supply, increasing government spending and decreasing
taxation.

Contents
[hide]

 1 Identifying
 2 Attributes
 3 Predictors of a recession
 4 Government responses
 5 Stock market and recessions
 6 Recession and politics
 7 History of recessions
o 7.1 Global recessions
o 7.2 United Kingdom recessions
o 7.3 United States recessions
 8 Late 2000s recession
o 8.1 United States
o 8.2 Other countries
 9 See also
o 9.1 Causes of recessions
o 9.2 Effects of recessions
 10 References
 11 External links

[edit] Identifying
{{Economics sidebaIn a 1975 New York Times article, economic statistician Julius Shiskin
suggested several rules of thumb for identifying a recession, one of which was "two down
quarters of GDP".[3] In time, the other rules of thumb were forgotten,[4] and a recession is now
often defined simply as a period when GDP falls (negative real economic growth) for at least
two quarters.[5][6] Some economists prefer a definition of a 1.5% rise in unemployment within
12 months.[7]

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."[8] 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.

[edit] Attributes
Please help improve this article by expanding it. Further information might be
found on the talk page. (March 2009)

A recession has many attributes that can occur simultaneously and includes declines in
coincident measures of activity such as employment, investment, and corporate profits.

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.[7] 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.[9]

[edit] Predictors of a recession

Although there are no completely reliable predictors, the following are regarded to be
possible predictors.[10]

 In the US a significant stock market drop has often preceded the beginning of a
recession. However about half of the declines of 10% or more since 1946 have not
been followed by recessions.[11] In about 50% of the cases a significant stock market
decline came only after the recessions had already begun.
 Inverted yield curve,[12] 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.[13] 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;[14] it is sometimes followed by a recession 6 to 18 months later[citation needed].
 The three-month change in the unemployment rate and initial jobless claims.[15]
  Index of Leading (Economic) Indicators (includes some of the above indicators).[16]
 Lowering of Home Prices. Lowering of home prices or value, too much personal
debts.

[edit] Government responses

Please help improve this section by expanding it. Further information might be
found on the talk page. (March 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 Keynesian economists may advocate increased
government spending to spark economic growth. Supply-side economists may suggest tax
cuts to promote business capital investment. Laissez-faire minded economists may simply
recommend that the government not interfere with natural market forces.

[edit] Stock market and recessions

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[17].

The real-estate market also usually weakens before a recession.[18] However real-estate
declines can last much longer than recessions.[19]

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.[20]

During an economic decline, high yield stocks such as fast moving consumer goods,
pharmaceuticals, and tobacco tend to hold up better[21]. However when the economy starts to
recover and the bottom of the market has passed (sometimes identified on charts as a MACD
[22]
), growth stocks tend to recover faster. There is significant disagreement about how health
care and utilities tend to recover[23]. 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..[24]

There is a view termed the halfway rule [25] 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.

[edit] Recession and politics

Generally an administration gets credit or blame for the state of economy during its time.[26]
This has caused disagreements about when a recession actually started.[27] 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.[28] The resulting
taming of inflation did, however, set the stage for a robust growth period during Reagan's
administration.

It is generally assumed[weasel  words] that government activity has some influence over the
presence or degree of a recession.[citation needed] 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.
They are often unsuccessful, at least at preventing a recession, and it is difficult to establish
whether they actually made it less severe or longer lasting.[citation needed]

[edit] History of recessions

[edit] Global recessions

There is no commonly accepted definition of a global recession, IMF regards periods when
global growth is less than 3% to be global recessions.[29] 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.[30]

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.

[edit] United Kingdom recessions

Main article: List of recessions in the United Kingdom

[edit] United States recessions

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.[8]
However, since 1980 there have been only eight periods of negative economic growth over
one fiscal quarter or more[31], 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-current: current[32]

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.[31]

[edit] Late 2000s recession

Further information: Late-2000s recession

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,[33] and 2008 saw many other nations
follow suit.

[edit] 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. [34]

U.S. employers shed 63,000 jobs in February 2008[35], 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." [36]. 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.[37]. For
2008, an estimated 2.6 million U.S. jobs were eliminated.[38]

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 [2]. That is
about five million more people unemployed compared to just a year ago [3]. This has become
largest annual jump in the number of unemployed persons since the 1940’s [4].
Although the US Economy grew in the first quarter by 1%, [39][40] 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.[41] The third quarter of 2008
brought on a GDP retraction of 0.5%[42] 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.
[43]

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 [44]
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.[45] By July of 2009 a growing number of economists believed that the recession
may have ended.[46] [47] 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.[48]

[edit] Other countries

This section does not cite any references or sources.

Please help improve this article by adding citations to reliable sources. Unsourced material may be
challenged and removed. (February 2008)

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.

Recession impact: Gulf region is global petrochem hub

5 Dec 2009, 1540 hrs IST, PTI

 Print   EMail   Discuss  Share  Save  Comment Text:

DUBAI: The global petrochemical industry's centre of gravity is shifting to the feedstock-
rich Middle East as dozens of new projects are coming up
in the region while production falters elsewhere.
According to Chemical Week, co-organizer of the Fourth Annual GPCA Forum, 19 million
metric tonne ethylene, the key building block for petrochemicals, is scheduled to be added
annually to the Gulf region capacity over the next five years, nearly doubling the current
capacity and providing extensive raw materials for downstream industries.

"By 2015, the region will supply one-third of the world's ethylene glycol, used in fibers and
anti-freeze; 20 per cent of global polyethylene and 13 per cent of higher-value
polypropylene," it said.

The Fourth Annual GPCA Forum is taking place in Dubai from December 8-10 and will hear
global industry leaders assessing the post-recession scenario with a focus on how the regional
players are integrating sustainability into their growth agendas.

Saudi Arabian petroleum and mineral resources minister Ali Al-Naimi will make the opening
keynote presentation at the forum. Saudi Arabia is expected to become the main global center
of petrochemical production with as many as 30 new petrochemical plants, including some
mega-projects in Jubail and Yanbu, are scheduled for completion next year with another 40 at
the planning phase.

Other large-scale units are also coming up in Qatar, Kuwait, Oman and Abu Dhabi, and an
estimated investment of around $170 billion is envisaged by 2015. \

"Beyond these basic petrochemicals projects, a new wave of investments in the Gulf region
will target specialty chemicals and high-value plastics production, which will add value and
will service industrial clusters based on the building blocks provided by the chemical
industry," GPCA secretary general Abdulwahab Al-Sadoun said.

On the first day of the Forum on December 9, Dr Vijay Govindarajan, one of the world's
leading experts on strategy and innovation and author of international best seller 'Ten Rules
for Strategic Innovators,' will speak at the Human Resources Breakout Session.

The past recession-hit year has seen an increase of trade issues, with some importing nations
raising dumping allegations against the region, and GPCA questioning the anti -dumping
moves against member-companies and countries.

"The global recession is over, led by Asia. The slowdown in the Middle East is reversing,"
says JADWA Investments chief economist Brad Bourland, who will talk about the economic
outlook and its impact on the chemical industry at the forum.