Recession: When Bad Times Prevail

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A recession is a sustained period when economic output falls and unemployment rises.
The recent global economic crisis was accompanied by recessions in many countries; simultaneous, or synchronized, recessions have occurred in advanced economies several times in the past four decades—the mid-1970s, early 1980s, early 1990s, and early 2000s.
Because the United States is the world’s largest economy and has strong trade and financial linkages with many other economies, most globally synchronized recession episodes also coincide with US recessions.
The recent episode reversed a trend of milder US recessions and was one of the longest and deepest recessions since the Great Depression of the 1930s, producing sharp increases in unemployment and substantial declines in output, consumption, and investment.

Common practical rule of thumb: two consecutive quarters of decline in a country’s real (inflation-adjusted) gross domestic product (GDP).
Drawbacks of the GDP-only rule: narrow focus, timeliness issues; a wider set of measures of economic activity often provides a better gauge.
NBER definition and practice:
- Quote: “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’s Business Cycle Dating Committee focuses on a comprehensive set of measures—including GDP, employment, income, sales, and industrial production—to analyze trends in economic activity.
Dating recessions can take time; example: it took the NBER committee a year to announce the beginning and end dates of the most recent US recession.
Measurement challenges: many variables are subject to revisions; different measures may show conflicting behavior.

Common causes described:
- Sharp changes in input prices (example: steep increase in oil prices) that push up the overall price level and reduce aggregate demand.
- Contractionary monetary or fiscal policies used to reduce inflation; when overused, these can reduce demand and trigger recessions.
- Financial market problems: sharp increases in asset prices and rapid expansion of credit can lead to overextension and difficulties in meeting debt obligations, prompting reductions in investment and consumption.
- Decline in external demand, especially for countries with strong export sectors; adverse effects in large countries (Germany, Japan, United States) are quickly felt by regional trading partners during globally synchronized recessions.
Prediction challenges:
- Many behavioral patterns around recessions have been documented (credit volume, asset prices, unemployment rate), but these variables may be endogenous to recessions.
- No single variable reliably predicts recessions; some variables—asset prices, the unemployment rate, certain interest rates, consumer confidence—appear useful but do not enable accurate forecasting of a significant fraction of recessions or their severity (duration and amplitude).

Historical frequency and sample:
- There were 122 completed recessions in 21 advanced economies over the 1960–2007 period.
- 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 (as documented):
- They typically last about a year and often result in a significant output cost.
- A recession is usually associated with a decline of 2 percent in GDP.
- In the case of severe recessions, the typical output cost is close to 5 percent.
- The fall in consumption is often small, but both industrial production and investment register much larger declines than that in GDP.
- Recessions typically overlap with drops in international trade as exports and, especially, imports fall sharply.
- The unemployment rate almost always jumps and inflation falls slightly because overall demand for goods and services is curtailed.
- Recessions tend to be associated with erosion of house and equity values and turmoil in financial markets.

The latest US recession (began in December 2007 and ended in June 2009):
- Duration: 18 months (the longest since 1960).
- Output decline: about a 3.7 percent decline in output (the deepest since 1960).
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, while consumption registered a decline in only four out of eight episodes since 1960.
Depression vs. recession:
- No formal definition of depression; most analysts consider a depression to be an extremely severe recession in which the decline in GDP exceeds 10 percent.
- Few depression episodes in advanced economies since 1960; most recent example: early 1990s in Finland with a decline in GDP of about 14 percent (coinciding with the breakup of the Soviet Union).
- Great Depression: the 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.

122 completed recessions in 21 advanced economies over the 1960–2007 period.
Proportion of time in recession typically about 10 percent.
Typical recession:
- Duration: about a year.
- GDP decline: 2 percent.
Severe recession typical output cost: close to 5 percent.
Latest US recession:
- Start: December 2007.
- End: June 2009.
- Duration: 18 months.
- Output decline: about 3.7 percent.
Typical US recession prior to 2007:
- Duration: about 11 months.
- Peak-to-trough output decline: 1.7 percent.
Finland early 1990s depression: decline in GDP of about 14 percent.
Great Depression US contraction: about 30 percent over a four-year period.

Recession: When Bad Times Prevail, F&D Magazine; Stijn Claessens and M. AYHAN KOSE.

Recession: When Bad Times Prevail
- Recession: When Bad Times Prevail (Markdown version)
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