For many, the idea of a recession can be extremely worrying. In fact, it's been a little over a decade since Americans faced one of the worst recessions in history: the great 2008 recession fueled by the collapse of the housing market. Well with that Coronavirus pandemic Many wonder if we are currently experiencing a recession.
In this post we will delve into the intricacies of important questions, such as: B. What is a recession? What causes a recession? What happens during a recession? And much more. Read end-to-end for a complete look at recessions, including warning signs and whether they can be predicted. Or, use the links below to jump to a section that might have an answer to one of your questions related to the recession.
What is a recession?
A recession is defined as the period between the peak of economic activity in an economy and its subsequent low point (low point), during which a significant decline in economic activity extends over more than a few months across the entire economy. Expansion, on the other hand, is the time between the lowest point in an economy and the next highest point at which economic activity gradually increases.
The National Bureau of Economic Research is the governing body that officially declares recessions and defines the following three criteria in its recession:
depth, which uses unemployment to measure how many workers are affected by an economic downturn.
diffusionThis measures how widespread the recession is by examining how many industries are affected by an economic downturn.
Duration, which measures how long an economic downturn takes before economic expansion occurs.
When it comes to identifying a recession, these criteria can be interchangeable as long as each criterion is met to some extent. For example, an extreme event can significantly offset weaker indications seen today.
Are we in a recession?
In a newer one NBER statementthey claimed so Yes, we are currently in a recession. This is due to the unprecedented levels of unemployment and production (depth) resulting from the COVID-19 pandemic, coupled with its broad reach across the economy (spread). While duration is far weaker than depth and diffusion, the extent of depth and diffusion of the current economic downturn classifies the current state of the economy as a recession.
NBER's definition of recession focuses heavily on spread. In order for a recession to be explained, it must affect the economy broadly, not just a single industry. For example, if the auto industry is experiencing a sharp decline in production but other industries continue to do well, then no recession can be explained.
The definition of recession in the economy uses real gross domestic product (GDP) as the best measure of economic activity, measured by the Bureau of Economic Analysis in two ways: on the product side (GDP) and on the income side (Gross Domestic Income (GDI)). NBER considers both product and income equally and uses these indicators to determine the months of peaks and troughs. NBER will also consider additional indicators when determining peaks and valleys, such as:
Wholesale sales adjusted for price changes
Real Personal Consumption Spending
Initial applications for unemployment insurance
However, these indicators carry less weight than GDP and GDI, but provide additional information to the NBER when deciding whether the economy is doing well or badly.
Recessions for Depression
After the industrial revolution of the 18th and 19th centuries, the majority of countries around the world saw a long-term macroeconomic trend of economic growth. However, if you look at the long-term growth over the past few centuries, you will see some dips along the way. These declines in economic activity are short-term fluctuations that indicate a slowdown in the economy that may last anywhere from a few months to a few years before returning to the long-term growth trend.
What are these dips? These slumps can be either a recession or, at worst, depression. What is the difference between a recession and a depression? Because of our recession in the previous section, recessions are characterized by a marked decline in economic activity that extends across the economy for a few months.
Depressions, On the other hand, they are similar to recessions, but differ in their severity. depressions are characterized as an extreme recession lasting three or more years or causing GDP to decline by at least 10%. While depression is less common than recessions, it does lead to high unemployment rates and low inflation, leading to economic stalemate.
In the history of the United States there has been about 50 economic recessions and a Depression in 1785. Of these periods of economic downturn, some recessions proved more severe than others, and each had its own factors that caused economic activity to decline.
What causes recessions?
The causes of recessions are obvious and uncertain. Many economists will disagree on certain causes of recessions and develop their own theories as to why recessions might occur. While no two recessions are alike, there are some characteristics that most recessions often share in common. Something common causes of recessions lock in:
High inflation: Inflation is the upward trend in prices over time, and while this isn't necessarily a bad thing, a sharp spike in inflation can lead to a recession. This is because when inflation is excessive, central banks tend to raise interest rates, which limits liquidity or the amount of money available for investment. When little money is available to invest in the stock market or other assets, a recession can ensue. The Federal Reserve decision to raise interest rates In the 1970s, combating stagflation led to the 1980 recession.
High deflation: On the other hand, high deflation can be just as detrimental to the economy as high inflation. In deflation, the price of goods falls, which can lead to a drop in wages. Lower wages can then lead to an even bigger drop in prices, which means that companies have to cut their expenses, for example when they lay off employees. High deflation can also lead to lower demand, which can lead to a recession. Trade Wars in the 1920s led to deflation, which was one of the causes of the Great Depression.
Sudden economic shock: An unexpected shock to an economy can also lead to a recession, leaving lawmakers and consumers with little time to react and come up with a plan. The 1973 oil embargo Cut oil supplies to the United States after it resupplies the Israeli military to gain the upper hand in post-war peace negotiations. In return, oil prices soared (together with petrol station lines!) leading to a recession. A more recent example was the sudden coronavirus pandemic, which stalled economies around the world, forcing businesses to close and workers to unexpectedly lose their jobs.
Bursting asset bubbles: In strong economies, investors often become over-emotional and trade an asset at a price that exceeds its intrinsic value, inflating an asset bubble such as real estate or stocks. However, when an asset bubble bursts and demand and prices fall, investors often panic, which can crash the market. The most Notable examples of the bursting of an asset bubble are the 2001 recession, in which the dot-com bubble burst, and the Great Recession of 2008, in which the housing bubble burst.
Stock market crash: A Bear marketIf a broad market index falls 20 percent or more over a period of two months or more, it can also lead to a recession. Stock markets can often crash when companies, investors and consumers lose confidence and "bears" start selling their assets for fear that the price of those assets will fall.
Over-indebtedness: Snowballs can occur when businesses or consumers incur excessive debt, making it difficult to get out of the red, which can lead to bankruptcy and debt defaults. When this happens, it can plunge the economy. One example is that Great recession of 2008where bankers lent risky mortgages to lenders. When house prices fell, buyers were unable to keep up with their mortgage payments, which caused the housing bubble to burst.
Technical progress: Technology is constantly changing our lives and our navigation through our daily lives. While innovation can be of great importance for further development, it can have serious implications for certain economic sectors. For example, Henry Ford's assembly line enabled the mass production of automobiles, but took away the jobs of millions of workers who had assembled the vehicles themselves. Today, speculation is mounting that AI and robots could make entire industries obsolete, which could lead to yet another recession.
Post-war slowdown: World War II was one of the factors that got America out of WWII Great Depression due to the high demand for military weapons and products that boosted the economy. However, once the wars are over, the economy can slow down, leading to a recession. This was noticeable after World War II and the end of the Korean War [1945and1953recessions.
As you can see, recessions are not all one and the same, which means that different causes can trigger one. From sudden economic shocks to technological advances, these are just a few of the most common causes that can lead to a recession.
What are the warning signs of a recession?
Recessions are not always predictable. If it did, governments would work hard to prevent it from happening in the first place. However, there are some warning signs that could lead to a recession. Knowing these warning signs can even help you understand them better how to prepare for a recessionSo you don't have to struggle to make ends meet when the economy collapses. Check out these top recession warning signs:
Increase in unemployment: If unemployment suddenly rises, it may mean a recession is underway. This is because companies may shut down or lose revenue when people lose their jobs. The unemployed, in turn, have less money to spend on the economy, which can lead to a cycle of falling GDP.
Inverted yield curve: The yield curve measures the relationship between the interest rates on short-term and long-term fixed income securities issued by the US Treasury Department. A inverted yield curve occurs when interest rates on short-term securities exceed interest rates on long-term securities, which may indicate an impending economic recession.
Increase in credit card debt and late payments: Consumers who spend their money help boost the economy. However, when using credit cards, they can become indebted at high interest rates, making defaults and bankruptcies more likely. In this case, a recession can be triggered.
Bad stock performance: The stock market is extremely volatile, which means it isn't always a good indicator of a recession as declines are common. However, if poor stock performance continues for an extended period of time, a prolonged bear market can lead to a recession.
Consumers lose confidence: Consumers are the backbone of the economy – without them the economy would collapse. When consumers lose confidence in the economy, they may be inclined to spend less because of it financial burden. If spending slows, it may be a sign that a future recession is looming.
Decline in the Leading Economic Index (LEI): Every month the Conference Board publishes the LEI, which examines factors such as unemployment insurance claims and stock market performance to predict future economic trends. When the LEI shows a decline, it can be a warning sign that a recession is imminent.
Knowing what warning signs to look out for can help prepare you for a recession. While predicting a recession is not always possible, you can use these warning signs to make predictions about future trends in the economy.
Can you predict a recession?
As you may see, you cannot always predict a recession. Take the current state of affairs, for example. No one could have predicted that the COVID-19 pandemic would spread across the world, closing economies in every part of the world and leaving millions of workers unemployed. However, you can get a good idea of whether a recession is in the near future by looking at the warning signs mentioned in the previous section, such as rising unemployment rates, an inverted yield curve, and a decline in consumer confidence.
What happens during a recession?
Recessions can be nerve-wracking for everyone, especially as unemployment is rising in a variety of economic sectors, meaning millions of people can lose their jobs. This can create a snowball effect where the economy keeps getting worse before it gets better. Here's what to expect during a recession:
Unemployment rises: One of the first events during a recession is an increase in unemployment. This is because companies often need to cut expenses during recessions, and employees are often one of the first expenses to cut.
Less spending: Obviously, when employees are laid off, their income is affected. With little or no income, consumers spend less money, which puts less money into the economy and harms companies and stocks.
National debt increases: With firms laying off workers and workers filing for unemployment, public debt rises as it tries to stabilize the economy with stimulus programs and relief supplies.
Assets lose value: Many assets, especially stocks and homes, can depreciate in value, which can cause homebuyers and investors to lose money or even go bankrupt.
Rate cut: During recessions, the Federal Reserve typically cuts interest rates to stimulate the economy. This makes it more likely for businesses and consumers to borrow and put more money into the economy to get it back on track.
Difficulties in finding a job: Widespread unemployment can saturate the labor market as more and more people are looking for jobs. This can be seen with the Boomerang generation (25-34 years old) who suffered badly after the great recession and still live at home with their parents to save money.
Recessions can be problematic for people from all walks of life because of their broad reach across the economy. With this in mind, it is important for individuals and companies to understand what happens during a recession in order to find solutions to get back on solid ground.
How long do recessions last?
Recessions can last anywhere in between two months and three years. The National Bureau of Economic Research defines a recession as a period of economic downturn that lasts a few months and a depression as a period of economic activity that lasts for three or more years. As long as the economic downturn does not exceed the three-year limit, it is classified as a recession.
The Great Recession of 2008 lasted about 18 months, making it the longest recession in American history. However, the other ten recessions after World War II only lasted between six and sixteen months, which shows how different each recession can be NBER data. The Great Depression, on the other hand, was far more severe than any other recession in American history. The great depression lasted between 1929 and 1939, with the worst years falling between 1929 and 1933, when unemployment rose to 25% and GDP fell by 30%.
It's important to remember that recessions are a normal part of the business cycle. As soon as a recession hits, the economy usually rebuilds – often much more than it did before the recession. However, even brief recessions can have lasting effects on the economy, such as: B. Political changes by government and social and psychological changes caused by economic hardship.
The uncertainties of COVID-19 and how it affects the market
In your latest statement, NBER announced that we are currently in the middle of a recession. The coronavirus pandemic emerged as a sudden economic shock, causing companies around the world to close their doors to prevent the spread of the disease and protect consumers at home. These measures dealt a massive blow to the economy and unemployment rose 16.9 million people in July 2020.
This sudden spike in unemployment and business closures created the recession we are currently in and will affect the market in several ways. What is different about the current recession we are facing is its uncertainty. Without a vaccine and with cases occurring in countries around the world, there doesn't seem to be an end in sight. This uncertainty is Effects on the market In many ways:
Stock market volatility: The uncertainty of the current global pandemic can create a volatile stock market where prices peak and fall depending on new advances in a vaccine or further setbacks that keep economies closed.
Homebody Economy: With stay at home policies in countries around the world, more and more consumers are expected to do so take part in activities outside the home less oftenB. go to the cinema, in restaurants etc. and instead shift their spending habits to the essentials and not to discretionary categories.
Low consumer confidence: It is expected that high unemployment along with a volatile stock market and vaccine uncertainties will continue to lead to this low consumer confidence in business, which means less spending. In turn, consumers could be pessimistic over the long term and continue to have concerns about discretionary spending.
Economic differences: While the coronavirus pandemic is far-reaching and affects numerous sectors of the economy, certain groups show deeper economic disparities, especially women and people of color. This leads many to view the current recession as "You assignment, “Because of higher job losses and shorter working hours for women.
COVID-19 is impacting the market in a number of ways due to its uncertainty and wide scope. Although we cannot predict the future or how the pandemic will play out, we can examine how this global event will affect different areas of the economy in order to develop a plan for the future.
Recessions can lead to turbulent times full of uncertainty and fear. With rising unemployment, business closures and decreased consumer confidence in the market, weathering a recession can be challenging for both consumers and businesses. In this post, we've discussed various subtleties of recessions, such as: B. how they are caused, which warning signals to watch out for and how the coronavirus is affecting the economy today.
With this information, you can create a plan to overcome this current recession along with future recessions and keep your finances in good health. Some tips include cutting down on unnecessary expenses, such as subscriptions and eating out, growing as well Emergency fund to keep you alive in financial trouble and diversify your portfolio Investing in a wide range of assets. At Mint, you can use ours free budgeting app to help you organize your finances and draw up a budget that works for you.
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