A Guide To Economic Recessions

A Guide To Economic Recessions


Table of Сontents

  1. Economic Recession Definition
  2. How Do Recessions Happen?
  3. What Happens During a Recession?
  4. U.S. Historical Recession Examples
  5. Global Recession Examples
  6. How Do Recessions Impact Investors & Non-Investors?
  7. Bottom Line

Recessions are unpleasant. People are losing their jobs, having trouble paying their payments, and some are even losing their houses. There is less money available for necessities like food and medical care, as well as fewer opportunities for indulgences like going on vacation or going out for a night on the town. In this piece, we will discuss the nature of economic recessions, the warning signals that indicate one is on the horizon, and the steps you may take to better weather its effects.

Economic Recession Definition

A significant slowdown in economic activity that continues for more than a few months is referred to as a recession. According to the conventional definition, it is characterized by a GDP decline for two consecutive quarters. The following are some examples of economic indicators that often fall during recessions:

  1. Income
  2. Employment
  3. Manufacturing
  4. Retail sales

Official declarations of the start and finish of recessions are made by the National Bureau of Economic Research (NBER), a private, nonprofit research institution that provides economic research to public officials, business professionals, and members of the academic community. According to the National Bureau of Economic Research (NBER), a recession is defined as “… a significant decline in economic activity spread across the economy that lasts more than a few months and is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

Gross domestic product, sometimes known as GDP, is the monetary measurement of the market worth of all of the final products and services produced by a nation during a certain time period.”

Real “When referring to GDP, it is important to note that the impacts of inflation on that statistic have been eliminated.

The gross domestic product is most often published on a yearly basis, although it may also be computed quarterly. The GDP may be negative during some quarters, while it may be positive during other quarters. The National Bureau of Economic Research maintains a careful check on the other four components of a recession, which are all published on a monthly basis: income, employment, manufacturing, and retail sales. This is in part owing to the swings that occur in quarterly GDP.


How Do Recessions Happen?

The following are examples of events that might trigger a recession:

  1. A drop in real income: A person’s “real income” is their income after adjusting it for inflation and excluding the effects of Social Security and welfare payments. When consumers experience a decline in their actual income, they reduce the amount they spend, which results in a decrease in demand.
  2. Lower wholesale-retail sales: When there is less demand for products and services, the quantity of sales often drops as a direct consequence. The data for sales are normalized to account for inflation, and they show how businesses responded to the demands of customers.
  3. Lower employment: A decrease in economic activity is a contributor to a drop in employment statistics as well as an increase in the number of claims for help from unemployment insurance.
  4. A drop in manufacturing activity: During an economic downturn, production in the manufacturing sector often decreases, as shown by the Industrial Production Report published by the Federal Reserve.
  5. A drop in monthly GDP estimates: In addition to this, the NBER considers the monthly GDP estimates that are offered by Macroeconomic Advisers.

The conduct of the stock market, on the other hand, does not indicate a period of economic contraction. This is due to the fact that stock prices often serve as leading indicators since they are based on the expected profits of public corporations. As investors prepare for an economic downturn, the stock market may see a decrease in value before the recession really begins. A bear market is said to have entered the stock market when it has experienced a fall of at least 20% over the course of at least two months. A bear market is considered to have entered the stock market when it has entered a bear market. Large drops in the stock market may directly lead to a slowdown in economic activity owing to the associated loss in net worth.

Recessions & The 5 Stages Of The Economic Cycle

A recession is an integral part of the economic cycle, which is also known as the business cycle. It may be broken down into the following stages:

  • Recession: The economy is growing more slowly than before, and the unemployment rate is falling, but prices are remaining the same.
  • Trough: the economy hits its lowest point
  • Recovery: The cycle of growth is restarted.
  • Expansion: However, inflationary pressures are developing as a result of the fast-expanding economy, historically low borrowing rates, and increasing output.
  • Peak: When growth reaches its maximum pace, imbalances in the economy arise, which will be addressed by a recession if they are not corrected earlier.

What Happens During a Recession?

The number of jobs available in the industrial sector may be the first indicator that we are entering a recession. This is due to the fact that manufacturers get orders many months in advance, and as orders for production diminish, factory employment also decreases. Those who have lost their employment are forced to reduce their spending, which has a ripple effect on other parts of the economy.

When consumer demand decreases, firms stop recruiting new workers, which leads to an increase in unemployment and additional decreases in consumer expenditure. At this point, some companies begin the process of filing for bankruptcy, and at the same time, some families begin to fail on their mortgage payments. Recent college graduates who are unable to find work that pays enough are another group that suffers significantly during a recession.


U.S. Historical Recession Examples

1. 2020 Pandemic Recession

In 2020, the United States economy had its worst recession since the Great Depression as a direct result of the Covid-19 epidemic, which led the economy to collapse at historic levels. In April 2020, there were a total of 20.8 million fewer jobs available, and the unemployment rate had risen to 14.7%. It wasn’t until August 2020 that the jobless rate dropped out of the double digits.

Around the same time that the pandemic first started, the stock market went through what is now often referred to as the collapse of 2020. In an effort to counteract the economic downturn that has been going on, the Federal Reserve has brought the fed funds rate down to 0%, and Congress has distributed $3.8 trillion in help. The economy expanded by 33.1% during the third quarter of 2020 as a direct result of these initiatives. According to official statistics, the recession was one of the shortest that has ever been recorded.


2. 2008 Great Recession

The Great Recession was officially declared to have started in December 2007 and continued until June 2009. The crisis that began with subprime mortgages and continued with extensive usage of derivatives was the spark that ignited a crisis in bank credit, which subsequently extended to the economy of the whole world.

GDP fell in each of the first, third, and fourth quarters of 2008, with the decline in Q4 being 8.4%. The first quarter of 2009 saw a decline in GDP, while the unemployment rate hit 10% in October of the same year. Both the GDP and the NBER announced the end of the recession in the third quarter of 2009.


3. 2001 Dot-Com Bubble Burst Recession

The economy shrank by 1.1% in the first quarter of 2001 and by 1.7% in the third quarter of 2001, a period that lasted just eight months and began in March 2001 and ended in November 2001. This economic downturn was brought on by the boom and subsequent fall experienced by the dot-com industry. Concerns over the transition from “19XX” dates to “20XX” dates in businesses’ computer software contributed in some measure to the growth seen during that time period. The terrorist assault on September 11 made an already bad recession much worse.

4. The 1990-1991 Recession

This economic downturn started in July 1990 and continued all the way until March 1991. The savings and loan crisis of 1989, which resulted in increased interest rates, as well as the Iraqi invasion of Kuwait, which resulted in the Gulf War, were the primary contributors to this problem. GDP fell by 3.6% in the fourth quarter of 1990, and it fell by 1.9% in the first quarter of 1991.

5. The 1980-1982 Recession

This was really the combination of two recessions: the first one began in January 1980 and continued through June of that year, while the second one started in July 1981 and continued until November 1982. The Federal Reserve’s effort to battle inflation by increasing interest rates contributed to this recession, which was in part caused by this endeavor.

Six out of the twelve quarters, or four each in 1980, 1981, and 1982, resulted in negative GDP, with the second quarter of 1980 being the worst, with a decline of 8.0%. The unemployment rate hit 10.8% in November and December of 1982, and it stayed at or above 10% for the following ten months. The Iranian oil embargo, which restricted the U.S. oil supply and drove up prices, was a contributing factor in the worsening of this recession.


6. 1973 Nixon/OPEC Embargo Recession

This economic downturn, which began in November 1973 and lasted until March 1975, was brought on by the oil embargo imposed by OPEC, which resulted in a fourfold increase in the price of oil. Richard Nixon, who served as president during this time period, took a number of actions that contributed to the crisis, including instituting wage and price restrictions that kept prices artificially high and, as a result, lowered demand. Because to the wage limits, wages were maintained artificially high, which led to enterprises laying off people.

Inflation was a direct result of President Nixon’s decision to withdraw the United States from the gold standard, which caused the price of gold to increase while simultaneously lowering the value of the U.S. dollar. GDP declined by 2.1% in the third quarter of 1973, and by 3.4% in the first quarter of 1974. This was followed by GDP declines of 3.7% in the third quarter of 1973, 1.5% in the fourth quarter, and 4.8% in the first quarter of 1975.


7. 1929 Great Depression

The contraction of the economy that occurs during a depression lasts for many years, as opposed to only a few quarters, which is the primary distinction between a recession and a depression.

Two severe economic downturns occurred in the United States during the years 1929 and 1938. During the first recession, which lasted from August 1929 through March 1933, the gross domestic product fell by 12.9%, and unemployment reached its highest point of 24.7%. Up until 1939, the unemployment rate consistently stayed in the double digits.

The Great Depression was caused by a number of different things. The Federal Reserve hiked interest rates in the spring of 1928, which was followed by a fall in the stock market 1929, which caused many individuals to lose their whole life savings. This was aggravated by a drought that lasted for ten years in the Midwest, the breadbasket of the nation, which caused widespread devastation among farmers and led to the notorious Dust Bowl.

The New Deal, which was enacted under President Franklin D. Roosevelt, contributed to an increase in GDP of 10.8% in 1934, 8.9% in 1935, 12.9% in 1936, and 5.1% in 1937. It wasn’t until the drought was finally finished in 1937 that the second recession was eventually brought to a conclusion. Coincidentally, it was also at this time that the government started increasing expenditures in preparation for World War II.


Global Recession Examples

According to the definition provided by the International Monetary Fund (IMF), a global recession is “a decline in annual per-capita real world GDP (purchasing power parity weighted), backed up by a decline or worsening for one or more of the seven other global macroeconomic indicators: industrial production, trade, capital flows, oil consumption, unemployment rate, per-capita investment, and per-capita consumption.”

Assuming that this definition is accurate, there have only been four worldwide recessions since the end of World War II: in 1975, 1982, 1991, and 2009. All of them lasted for just a single year, but the Great Recession of 2008 was by far the worst because of the number of nations that were impacted and the fall in real-world GDP per capita.


How Do Recessions Impact Investors & Non-Investors?

Speculative investments are often liquidated and the proceeds are used to purchase safer assets, such as government bonds, during economic downturns or in anticipation of economic downturns. Equity investors avoid taking risks and instead invest in well-established, high-quality businesses that have healthy balance sheets and relatively low levels of debt. If a company has a substantial amount of debt and a poor cash flow, there is a good chance that it will be unable to manage the cost of its debt payments in addition to the cost of maintaining operations.

The consumer staples sector of the stock market is one area that, even during economic downturns, tends to maintain a higher level of stability. Food, drinks, home goods, alcoholic beverages, and tobacco are the kind of things that customers often purchase regardless of their financial condition, and businesses operating in this sector create and sell these commodities. These kinds of things are sometimes referred to as being non-discretionary, and they are typically the very last items that customers cross off their shopping lists.


Who Benefits From a Recession?

Those who have set themselves up to make a profit from economic turmoil have a better chance of doing so during a recession. On the other hand, lessons learned from the past have demonstrated that accurate prediction of the timing of these occurrences is very difficult, if not impossible. Because fewer dollars are being circulated throughout the economy, a recession may have the effect of reducing inflation. It is common practice for the Federal Reserve and other central banks from around the globe to make an effort to avert recessions by boosting the economy via the reduction of taxes, the increase of expenditure on social programs, and the disregard of the budget deficit. The American Recovery and Reinvestment Act (often known as TARP) was an economic stimulus program that was voted into law by Congress in 2009 as a reaction to the Great Recession.

Bottom Line

In spite of the fact that economic downturns are a natural and inevitable part of the cycle, surviving one may be challenging at times. When investors and non-investors alike are aware of the warning indications of an impending recession, they are better able to prepare for its worst impacts and take preventative measures, such as reducing their debt and staying away from risky ventures.

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