HOME WEB NEWS IMAGES CLASSIFIEDS YELLOW PAGESPOLLS - SURVEYS WIKI COUNTRIES PHOTOS US UK INDIA
Avoo.com provides meta search results from various sources

Economic_depression


Google



1

The references in this article would be clearer with a different or consistent style of citation, footnoting, or external linking.

This article or section needs to be updated.
Please update the article to reflect recent events, and remove this template when finished.

In macroeconomics, a recession is a decline in a country\'s gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year.

In US, the judgment of the business-cycle dating committee of the National Bureau of Economic Research regarding the exact dating of recessions is generally accepted. The NBER has a more general framework for judging recessions:

A recession is 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. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.http://www.nber.org/cycles/recessions.html

For the past four recessions, the NBER decision has approximately confirmed with the definition involving two consecutive quarters of decline. However the 2000 recession did not involve two consecutive quarters of decline, it was preceded with four quarters of alternating growth and declinehttp://online.wsj.com/article/SB120465644800210769.html OPEC Is Expected to Leave Output Unchanged By Guy Chazan (Graphics: Crude demand/GDP)

A recession may involve simultaneous declines in coincident measures of overall economic activity such as employment, investment, and corporate profits. Recessions may be associated with falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as stagflation. A severe or long recession is referred to as an economic depression. A devastating breakdown of an economy (essentially, a severe depression, or a hyperinflation, depending on the circumstances) is called economic collapse.

Market-oriented economies are characterized by economic driving cycles, but actual recessions (declines in economic activity) do not always result in macroeconomic sub-financial declines in gross domestic product. There is much debate, sometimes ideologically motivated, as to whether government intervention smoothes the cycle (see Keynesianism), exaggerates it (see real business cycle theory), or even creates it (see monetarism).

Contents

Predictors of a recession

There are no totally reliable predictors. However these are regarded to be possible predictors.http://www.mitpressjournals.org/doi/pdfplus/10.1162/003465398557320?cookieSet=1 Predicting U.S. Recessions: Financial Variables as Leading Indicators, A Estrella, FS Mishkin, 1995, MIT Press

By Michael Hudson the model developed by Fed economist Jonathan 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 definite indicator;http://www.ny.frb.org/research/epr/forthcoming/0801rose.html Signal or Noise? Implications of the Term Premium for Recession Forecasting it is sometimes followed by a recession 6 to 18 months later.

Delayed identification of a recession

Because of the way a recession is defined, the beginning (peak in the economic cycle) or end (trough) of a recession can only be identified after the change in the trend has been present for several months.

The 2001 recession was announced by NBER in November 2001http://www.nber.org/feldstein/bg120401.html From Recession to Recovery, which later turned out to be the trough. Thus the recession ended the month it was announced by the NBER. In July 1981 NBER declared an end to a six-month recession (January to July 1980) in the last year of Jimmy Carter\'s presidency. For the 1981-82 recession during President Reagan\'s first term, NBER announced the July 1981 peak in January 1982, and the November 1982 trough in July 1983.http://www.nationalreview.com/nrof_comment/comment-kaza072403.asp The Umpire Made the Right Call-The recession ended 20 months ago. Period, Greg Kaza, July 24, 2003

Economist Robert J. Gordon, a member of the NBER committee has stated that any announcement about the start of a new recession starting in 2008 was unlikely before the last few months of 2008 at the earliesthttp://www.nytimes.com/2008/03/08/business/08recession.html?bl&ex=1205125200&en=bff38e35cdd49324&ei=5087%0A Seeing an End to the Good Times (Such as They Were), DAVID LEONHARDT, March 8, 2008 chart.

History of recessions in the United States

According to the economists,http://www.nber.org/cycles/ since 1854, the U.S.A. has encountered 32 cycles of expansions and contractions, on average with 17 months of contraction and 38 months of expansion. However in recent years, they have been shorter and much less common. Since 1980, there have been only four recessions (see charts to see how stocks did in these periods). The charts show the impact on stock market indices.

  • January-July 1980: 6 months chart (worst quarter GDP Growth -7.8% [1])
  • July 1981-November 1982: 16 months chart (worst quarter GDP Growth -6.4%)
  • July 1990-March 1991: 8 months chart (worst quarter GDP Growth -3.0%)
  • March 2001-November 2001: 8 months chart (worst quarter GDP Growth -1.4%)

During March 1991 to March 2001, the United States experienced the longest economic expansion - 120 months.

Note that the depth of the recession has been decreasing in magnitude, suggesting the Fed measures have been effective.

Responding to a recession

Strategies for moving an economy out of a recession vary depending on which economic school the policymakers follow. While Keynesian economists may advocate deficit spending by the government to spark economic growth, other supply-side economists may suggest tax cuts to promote business capital investment, while even others such as laissez-faire economists may simply recommend the government remain "hands off" and not interfere with the natural market forces of the economy whatsoever.

Functionally, there is no difference between deficit spending and tax cuts. Both add money to the economy. Every form of money is a form of debt. History shows every depression in American history began with several years of federal surpluses, which removed debt (money) from the economy.

Federal Reserve response

The Federal Reserve has responded to potential slow down by lowering the target Federal funds rate during the recessions and other periods of lower growth. In fact the federal reserve lowering has recently predated recessions.http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html Historical Changes of the Target Federal Funds and Discount Rates The charts show the impact on S&P500 and short and long interest rates.

SiegelStocks for the Long Run, J. Siegel, 2002 points out that the cuts in fed funds rate are now widely anticipated, thus the cuts are no longer followed by a rise in the stock market indexes.

Since the recessions have been less frequent in the past two decades and GDP declines have been lesser in magnitude, suggest that the Fed has been successful in moderating the contractions. However some critics argue that reducing the rates have had the effect of adding too much liquidity.

Stock market and recessions

Some of the recessions are anticipated by stock market declines. In Stocks for the Long Run, Siegel mentions that since 1948, the ten recessions were preceded by a stock market decline, by a lead time of 0 to 13 months (average 5.7 months). It should be noted that ten stock market declines of greater than 10% in the DJIA were not followed by a recession.Siegel, Jeremy J. (2002). Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, 3rd, New York: McGraw-Hill, 388. ISBN 9780071370486

Real estate market also weakens before a recession,http://www.ciovaccocapital.com/sys-tmpl/investingeconomicslowdown/ Housing Has A Strong Correlation To Stocks Chris Ciovacco, September 19, 2006 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 the economic cycles for timing investments. Even NBER takes a few months to determine if a peak or trough has occurred.http://www.washingtonpost.com/wp-dyn/content/article/2007/12/10/AR2007121001589.html Recession Predictions and Investment Decisions by Allan Sloan, December 11, 2007

During the decline, high yield stocks such as financial services, pharmaceuticals, and tobacco can hold up better when economy is contracting.http://money.cnn.com/2008/02/05/news/economy/recession_invest.fortune/index.htm?postversion=2008020603 Recession? Where to put your money now, Shawn Tully, February 6 2008 However after the bottom (identifiable as MACD crossovers), when economy starts to recover, the growth stocks will recover faster. There is significant disagreement about health care and utilities.http://www.forbes.com/2008/01/28/ibm-hpq-recession-pf-ii_jl_0128money_inl.html Rethinking Recession-Proof Stocks Joshua Lipton 01.28.08 International stocks may provide some safely through diversification; however, economies that are closely correlated with that of the U.S.A. may also be affected by a recession in the U.S.A.http://seekingalpha.com/article/60656-recession-stock-picks-from-morgan-stanley-s-douglas-cohen Recession Stock Picks From Morgan Stanley\'s Douglas Cohen, January 18, 2008

Global recessions

There is no commonly accepted definition of a global recession.http://www.imf.org/external/np/vc/2002/040502.htm The Recession that Almost Was, Kenneth Rogoff, International Monetary Fund, Financial Times, April 5, 2002 IMF estimates that global recessions seem to occur over a cycle lasting between eight and 10 years. During what IMF terms past three global recessions in the last three decades, global per capita output growth was zero or negative.

Economists at the International Monetary Fund say that a global recession would take a slowdown in global growth to 3 percent or less. By this measure, three periods since 1985 qualify: 1990-1993, 1998 and 2001-2002.http://www.bloomberg.com/apps/news?pid=20601087&sid=arlKrFbn3pfY&refer=home Global Recession Risk Grows as U.S. `Damage\' Spreads International Monetary Fund has recently lowered its 2008 global growth projection from 4.9 percent to 4.1 percent (as measured in terms of purchasing power parity).http://www.mydesert.com/apps/pbcs.dll/article?AID=/20080224/COLUMNS03/802240303/1003/business World affected by U.S. economy

There is significant speculation about a possible U.S. recession in 2008. If it happens, it is expected to have a global impact.http://money.cnn.com/2008/01/21/news/economy/recession_global_dimensions.fortune/index.htm?postversion=2008012213 A recession of global dimensions?January 22 2008http://www.forbes.com/afxnewslimited/feeds/afx/2007/08/24/afx4050712.htmlMarkets indicating 20 percent chance of global recession in 2008 - UBS 08.24.07http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3352594.ece IMF chief warns of worldwide impact of American slowdown, February 12, 2008 U.S. represents about 21 percent of the global economy. Impact of a U.S. recession can spread though the following:http://www.bloomberg.com/apps/news?pid=20601087&sid=arlKrFbn3pfY&refer=home

  • Less spending by American consumers and companies reduces demand for imports.
  • The crisis of the U.S. subprime-mortgage market has pushed up credit costs worldwide and forced European and Asian banks to write down billions of dollars in holdings.
  • Dropping U.S. stock prices drag down markets elsewhere.

Possibility of a 2008 recession

Since 2007, there has been considerable discussion about a possible recession starting in late 2007 or early 2008. The United States housing market correction (a consequence of United States housing bubble) and subprime mortgage crisis have significantly contributed to anticipation of a possible recession.

While some economists are confident about a recessionhttp://recession.org/library/articles/34-articles/51-where-is-the-economy-going Fifteen key economists, policymakers and strategists weigh in on a week of volatility and economic turmoil., others are not convinced about a recession.http://www.thestreet.com/s/eight-reasons-there-wont-be-a-recession/newsanalysis/investing/10405444.html?puc=googlefi Eight Reasons There Won\'t Be a Recession, 02/28/08 Some believe that the current slowdown may at best be a mild and brief recession.http://www.forbes.com/markets/feeds/afx/2008/02/21/afx4682807.html Global Insight believes U.S. in early stage of \'mild and short recession\' 02.21.08 There is anticipation that the economy may start recovering in the later part of 2008.http://daily.stanford.edu/article/2008/2/27/profsExamineEconomicDecline Profs. examine economic decline, February 27, 2008

Note that the GDP-growth (real seasonally adjusted annual rate) for the last quarter of 2007 was 0.6http://www.bea.gov/national/nipaweb/TableView.asp#Mid Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product as revised on February 28, 2008. It was 2.2 for all of 2007.

Nouriel Roubini has outlined a harsh 12-step scenario.http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080228/REG/346385380/1036 NYU professor predicting a whale of a bear market, February 28, 2008

  1. U.S. home prices will fall between 20% and 30% from their peak. NYTimes chart
  2. Losses to the financial system from the subprime disaster, as high as $300 billion, are now spreading to near-prime and prime mortgages.
  3. The recession will lead to a sharp increase in defaults on other forms of unsecured consumer debt.
  4. Monoline insurance companies will take on their insurance of residential mortgage-backed securities, collateralized debt obligations and other asset-backed securities products, losses which are much higher than the $10 billion-to-$15 billion rescue package that regulators are trying to arrange.
  5. The commercial real estate loan market will soon enter into a meltdown similar to the subprime one.
  6. Some large regional or even national banks that are very exposed to mortgages, residential and commercial, may go bankrupt.
  7. Banks\' losses will grow as a result of hundreds of billions of dollars of leveraged loans on their balance sheets at values well below par, currently about 90 cents on the dollar.
  8. Once a severe recession starts, a massive wave of corporate defaults will take place. Typically U.S. corporate default rates are about 3.8% (1971-2007); in 2006 and 2007 this figure was a rather low 0.6%. And in a typical U.S. recession such default rates surge above 10%.
  9. The “shadow banking system” (as defined by Pimco, it is composed by non-bank financial institutions that borrow short and in liquid forms and lend or invest long in more illiquid assets), will soon get into serious trouble.
  10. Stock markets in the U.S. and overseas will start pricing in a severe U.S. recession and a sharp global economic slowdown.
  11. The credit crunch that is affecting most credit markets and credit derivative markets will lead to a drying up of liquidity in several financial markets, including otherwise very liquid derivatives markets.
  12. A vicious cycle of losses, capital reduction, credit contraction, forced liquidation of assets at below fundamental prices will ensue, leading to further credit contraction.

The EEAG Report on the European Economy 2008 states:http://www.cesifo-group.de/portal/page/portal/ifoHome/B-politik/70eeagreport/30PUBLEEAG2008/_executive_summary_eeag2008 The EEAG Report on the European Economy 2008 Executive Summary

The 2008 performance of the U.S. economy is difficult to predict due to the declining house prices and the subprime crisis, the full impact of which is still unclear. ..., it is not in our view very likely that the U.S. economy will fall into recession. Recessionary tendencies will be counteracted by both low interest rates and a substantial fiscal stimulus programme. Our forecast is that U.S. GDP will grow by 1.7 percent in 2008.

U.S. employers lost 63,000 jobs in February 2008, the most in five years, supporting the view that the U.S. is falling into a recession. http://online.wsj.com/article/SB120489597965119543.html?mod=hpp_us_whats_news Jobs Data Suggest U.S. Is in Recession, By SUDEEP REDDY, March 8, 2008, chart

Recession and politics

Generally an administration gets credit or blame for the state of economy during its time.http://news.bbc.co.uk/1/hi/business/7215351.stm Economy puts Republicans at risk, 29 January 2008 This has caused disagreements about when a recession actually started.budget.senate.gov/democratic/press/2003/fs_bushrecession073103.pdf THE BUSH RECESSION, PREPARED BY: DEMOCRATIC STAFF, SENATE BUDGET COMMITTEE,July 31, 2003 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 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.http://www.time.com/time/magazine/article/0,9171,922689-2,00.html Ready for a Real Downer, Monday, Nov. 23, 1981 By GEORGE J. CHURCH The resulting taming of inflation, did, however, set the stage for a robust growth period during Reagan\'s administration.

President Bush stated in early 2008 that US was not entering a recession.http://news.bbc.co.uk/1/hi/business/7283512.stm Bush insists US not in recession

See also

Notes

References

External links

This article is licensed under the GNU Free Documentation License. It uses material from Wikipedia


Advertise with Us | Search Marketing | Help | Suggest a Site | Privacy Policy
© 2008 www.avoo.com. All rights reserved.