In economics, the term recession generally describes the reduction of a country's gross domestic product (GDP) for at least two quarters.[1][2] The usual dictionary definition is "a period of reduced economic activity", a business cycle contraction.[3][4]
The United States-based National Bureau of Economic Research (NBER) defines economic recession as: "a significant decline in [the] economic activity spread across the economy, 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."[5]
Attributes of recessions
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.
An alternative, less accepted definition of recession is a downward trend in the rate of actual GDP growth as promoted by the business-cycle dating committee of the National Bureau of Economic Research.[1] That private organization defines a recession more ambiguously as "a significant decline in economic activity spread across the economy, lasting more than a few months." A recession has many attributes that can occur simultaneously and can include declines in coincident measures of activity such as employment, investment, and corporate profits. A severe or prolonged recession is referred to as an economic depression.
You can also get more information by going to http://recession.org/definition
[edit]Predictors of a recession
There are no completely reliable predictors. These are regarded to be possible predictors.[6]
- In the U.S. 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.[7] In about 50% of the cases a significant stock market decline came only after the recessions had already begun.
- Inverted yield curve,[8] 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.[9]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;[10] 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.[11]
- Index of Leading (Economic) Indicators (includes some of the above indicators).[12]
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, supply-side economists may suggest tax cuts to promote business capital investment. Laissez-faire economists may simply recommend that the government not interfere with natural market forces.
Both government and business have responses to recessions. In the Philadelphia Business Journal, Strategic Business adviser Carter Schelling has discussed precautions businesses take to prepare for looming recession, likening it to fire drill. First, he suggests that business owners gauge customers' ability to resist recession and redesign customer offerings accordingly. He goes on to suggest they use lean principles, replace unhappy workers with those more motivated, eager and highly competitive. Also over-communicate. "Companies," he says, "get better at what they do during bad times." He calls his program the "Recession Drill." [13]
Likely 2008/2009 recession in some countries
United States
The United States housing market correction (a 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. [36]
U.S. employers shed 63,000 jobs in February 2008[37], 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." [38]. On October 1st, 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.[39]
Although the US Economy grew in the first quarter by 1%, [40] [41] 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.[42] The third quarter of 2008 brought on a GDP retraction of 0.5%[43] 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.[44]
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[45]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.
UNITED KINGDOM
The UK is facing a serious risk of recession within months, the findings of a survey of almost 5,000 small, medium and large businesses suggest.
The British Chambers of Commerce's (BCC) quarterly report found the credit crunch and rising costs had dented the most important sectors of the economy.
It came as the FTSE 100 stock index briefly dipped into a "bear market".
Prime Minister Gordon Brown said he was the right man to steer the UK economy through "difficult times".
Global stock indexes have also fallen amid concerns about the global economy.
The gloom surrounding the UK economy has been amplified by a string of further developments including:
- Housebuilder Persimmon revealing it had cut 2,000 jobs amid woes in the UK housing market. The building firm said that completions of house sales in the first six months of the year were down 30%, during what it described as the "most challenging period in our recent history".
- The Council of Mortgage Lenders saying that a recovery in the mortgage squeeze was still "some way away" - revealing that the number of loans for home purchases remained low in May at 52,700.
- Shares in troubled lender Bradford & Bingley falling another 16% on Tuesday after Monday's 18% drop as concerns lingered over its fundraising plans.
Grim outlook
Firms in the manufacturing and services sector said domestic sales and orders had slowed over the past three months, said the BCC, which added that firms were also experiencing serious cash-flow problems.
Its economic adviser, David Kern, said the survey showed a "menacing deterioration" in UK prospects.
"We are now facing serious risks of recession," he said.
"The outlook is grim and we believe that the correction period is likely to be longer and nastier than expected."
 There has been disappointing news on house building and mortgages |
There are a number of definitions of a recession, but the most commonly used one is when there are two quarters in a row of economic contraction, or negative growth.
Services firms, which include restaurants, gyms and tour operators, have been particularly hard hit, the BCC reported.
Sales and orders, job expectations and confidence in this sector had hit their lowest levels since the recession of the early 1990s.
The BCC's director general David Frost said the report was deeply worrying.
"I am sending Alistair Darling and Gordon Brown a strong message from the businesses I meet every day up and down the country," he said.
"To put more pressure on business would not only restrict business growth and hit the consumer hard, it would crush further what our economy is based on - confidence."
Mortgage drought
The report is likely to add to the wave of pessimism sweeping across the business world, from retailers to house builders.
Last week, the housing market suffered another blow when the Bank of England said mortgage approvals had plunged by 28% in May and were 64% lower than a year earlier.
INDIA
Though no one likes or wants a recession, almost everyone appears (looking at WEF, Davos) reconciled to one in the United States. Meanwhile, politicians continue to downplay any fears of global repercussions, citing decoupling of the United States and other economies as a buffering factor. But what is the reality for countries like India?
It would be naïve to imagine that a recession in the United States would have no impact on India. The United States accounts for one-fourth of the world GDP and any significant slowdown is bound to have reverberations elsewhere. On the other hand, interdependencies between the US economy and emerging economies like India and China has reduced considerably over the last two decades. Thus, the effect may not be as drastic as would have been the case in the 1980s.
Even so, fears of a US recession led to panic in the Indian stock market. January 21 and 22 saw a meltdown with a mind-boggling US$450 billion in market capitalization being vaporized. An unprecedented interest cut by the Fed led to a bounce-back on January 23 and at the time of this writing, the benchmark index (BSE) has gained 2.5%, almost in line with Hang-Seng, Nikkei, and Kospi.
History might hold a clue here. The last time the bubble burst (2001-2002), the DJIA went down by 23%, while the Indian Index fell by 15%.
Much has happened between then and now. The Indian economy has shown a robust and consistent growth trajectory and the projection for 2008 is 9%. Indian exports to the United States account for just over 3% of GDP. India has a healthy trade surplus with the United States.
In other words, the effects of this recession on India may be quite distinct from those of the past. Here are some areas worth following:
1. A credit crisis in the United States might lead to a restructuring of asset allocation at pension funds. It has been suggested that CalPERS is likely to shift an additional US$24 billion to its international portfolio. A large portion of this is likely to flow into India and China. If other funds follow suit, a cascading effect can be expected. Along with the already significant dollar funds available, the additional funds could be deployed to create infrastructure--roads, airports, and seaports--and be ready for a rapid takeoff when normalcy is restored.
2. In terms of specific sectors, the IT Enabled Services sector may be hit since a majority of Indian IT firms derive 75% or more of their revenues from the United States--a classic case of having put all eggs in one basket. If Fortune 500 companies slash their IT budgets, Indian firms could be adversely affected. Instead of looking at the scenario as a threat, the sector would do well to focus on product innovation (as opposed to merely providing services). If this is done, India can emerge as a major player in the IT products category as well.
3. The manufacturing sector has to ramp up scale economies, and improve productivity and operational efficiency, thus lowering prices, if it wishes to offset the loss of revenue from a possible US recession. The demand for appliances, consumer electronics, apparel, and a host of products is huge and can be exploited to advantage by adopting appropriate pricing strategies. Although unlikely, a prolonged recession might see the emergence of new regional groupings--India, China, and Korea?
4. The tourism sector could be affected. Now is the time to aggressively promote health tourism. Given the availability of talented professionals, and with a distinct cost advantage, India can be the destination of choice for health tourism.
5. A recession in the United States may see the loss of some jobs in India. The concept of Social Security, that has been absent until now, may gain momentum.
6. The Indian Rupee has appreciated in relation to the US dollar. Exporters are pushing for government interventionand rate cuts. What is conveniently forgotten in this debate is that a stronger Rupee would reduce the import bill, and narrow the overall trade deficit. The Indian central bank (Reserve Bank of India) can intervene anytime and cut interest rates, increasing liquidity in the economy, and catalyzing domestic demand. A strong domestic demand would also help in competing globally when the recession is over.
In summary, at the macro-level, a recession in the US may bring down GDP growth, but not by much. At the micro-level, specific sectors could be affected. Innovation now may prove to be the engine for growth when the next boom occurs.
For US firms, who have long looked at China as a better investment destination, this may be a good time to look at India as well. After all, 350 million people with purchasing power cannot be ignored. This is not a sales pitch for India, but only a gentle suggestion to US corporations.
JAPAN
Japan became the latest major economy to fall into recession and Citigroup said on Monday it would cut 52,000 jobs, one of history's largest layoffs, stoking fears the global economic slump is worsening.
After a weekend meeting of the Group of 20 advanced and emerging economies failed to come up with specific new measures to ease the world's financial strains, the IMF said it needed at least $100 billion in extra funding to fight the crisis.
Citigroup, the U.S. bank with the farthest global reach, announced the biggest round of job cuts since the financial crisis erupted last year, slashing 15 percent of its workforce in a bid to return to profitability.
The cuts come on top of 23,000 reductions Citigroup had already announced and lag only the 60,000 layoffs by IBM in July 1993 as the largest ever, according to outplacement firm Challenger, Gray & Christmas Inc.
After stock markets closed, the U.S. Treasury said it had completed equity purchases in 21 more banks totaling $33.56 billion, including $6.6 billion in U.S. Bancorp. Life insurers also joined the long list of companies seeking funds under Washington's $700 billion financial bailout program.
Seeking to contain the economic fallout for the U.S. auto industry, Democratic lawmakers proposed a politically potent plan to bail out big American car firms. But its passage is uncertain even with millions of jobs at stake.
Automakers have taken the brunt of the impact from a dramatic decline in U.S. consumer spending, triggered by the housing crash and worsened by rising unemployment. Germany said it was ready to guarantee funds for General Motors' Opel unit. Even Japan's Toyota came under ratings scrutiny as signs of recession spread across the globe.
CREEPING GLOBAL RECESSION
The United States fell into a recession in April and the downturn is expected to last 14 months, with unemployment reaching 7.7 percent this year, according to a survey of private forecasters by the Federal Reserve Bank of Philadelphia.
That would be the longest contraction since the 16-month recession that ended in 1982, according to the National Bureau of Economic Research. The organization has not declared a recession this year, in part because output expanded in the second quarter, fueled by economic stimulus plan payments.
A top Senate aide said another stimulus plan was not likely to be approved during Congress' post-election session this week, the last time lawmakers are to meet in 2008.
In Britain, the main employers group forecast that joblessness could rise to almost 9 percent by 2010, and France's central bank said the French economy should contract 0.5 percent in the fourth quarter.
The euro zone is already in recession, usually defined as an economy shrinking for two consecutive quarters.
Japan surprised markets with data showing the world's second-biggest economy was in its first recession in seven years as the worst global financial crisis since the Great Depression curbed demand for exports. The 0.1 percent contraction in July-September was worse than forecast.
China's central bank said the risk of a downturn in its economy was rising, and it also warned that the global slowdown could hurt its exports.
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