## Recession: When Bad Times Prevail

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### Calling a recession
- Recession refers to a period of decline in economic activity.  
- Practical rule of thumb: two consecutive quarters of decline in real GDP is commonly used, but this definition is narrow.
- The NBER Business Cycle Dating Committee defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.”
- The NBER focuses on a comprehensive set of measures—including GDP, employment, income, sales, and industrial production—because different indicators can show conflicting behavior and many series are revised after initial release.
- Determining recessions can take time; e.g., the NBER committee took a year to announce the beginning and end dates of the most recent US recession.

### Why recessions happen
- Recessions have multiple potential sources:
  - Sharp changes in input prices (example: a steep increase in oil prices can push up the overall price level and reduce aggregate demand).
  - Contractionary monetary or fiscal policies aimed at reducing inflation can, if used excessively, lead to declines in demand and cause a recession.
  - Financial market problems: sharp increases in asset prices and rapid credit expansion often coincide with rapid accumulation of debt; when corporations and households become overindebted and face difficulties meeting obligations, they reduce investment and consumption, decreasing economic activity.
  - Declines in external demand, especially for countries with strong export sectors, can trigger recessions; adverse effects in large countries transmit rapidly to regional trading partners during globally synchronized recessions.
- Predicting recessions is challenging:
  - Many variables (credit volume, asset prices, unemployment rate) show behavioral patterns around recessions but may be endogenous.
  - Some variables—asset prices, the unemployment rate, certain interest rates, and consumer confidence—appear useful for prediction, but economists still fail to accurately forecast a significant fraction of recessions and their severity (duration and amplitude).

### Frequency, typical features, and costs of recessions
- In 21 advanced economies over the 1960–2007 period, there were 122 completed recessions.
- The proportion of time spent in recession (percentage of quarters a country was in recession over the full sample period) was typically about 10 percent.
- Common characteristics across recessions:
  - Typical duration: about a year.
  - Typical output cost: associated with a decline of 2 percent in GDP; in severe recessions, the typical output cost is close to 5 percent.
  - Consumption fall: often small, while industrial production and investment register much larger declines than GDP.
  - International trade: recessions typically overlap with drops in trade as exports and especially imports fall sharply.
  - Labor and prices: the unemployment rate almost always jumps and inflation falls slightly because overall demand is curtailed.
  - Financial markets: recessions tend to be associated with erosion of house and equity values and turmoil in financial markets.

### The recent US recession and what constitutes a depression
- The US recession beginning in December 2007 and ending in June 2009:
  - Duration: 18 months (the longest since 1960).
  - Depth: about a 3.7 percent decline in output.
- Typical US recession prior to 2007:
  - Duration: about 11 months.
  - Peak-to-trough output decline: 1.7 percent.
  - Investment and industrial production fell in every recession; consumption declined in only four out of eight episodes since 1960.
- Depression: no formal definition, but most analysts consider a depression an extremely severe recession with GDP decline exceeding 10 percent.
  - Since 1960, only a handful of depressed episodes in advanced economies; most recent example: early 1990s Finland with about a 14 percent decline in GDP (coinciding with the breakup of the Soviet Union).
  - The Great Depression: US economy contracted by about 30 percent over a four-year period.
  - The latest recession, while severe, had an output cost much smaller than that of the Great Depression.

*Stijn Claessens and M. Ayhan Kose, “Recession: When Bad Times Prevail”*

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_Source: https://www.imf.org/-/media/files/publications/fandd/back-to-basics/claessens-recession.pdf_