What is a recession?

By glblguy

Recession Sale signPhoto by: megananne

The word recession seems to be everywhere these days. You hear it on the nightly news, read about it in the daily paper, politicians discuss it constantly and it’s the topic at the “water cooler” in the office. As I write this article, the word recession is on the main pages for CNN.com, MSN Money, USA Today Money, Google News…well you get the picture. Everyone is talking about it, writing about it, and worrying about it.

But what is a recession anyway? I’ll admit, I didn’t know until I did the research for this article. I had a basic idea and knew it wasn’t generally considered a good thing, but if someone asked me to explain a recession in detail, I wouldn’t have been able to. Given I blog on personal finance, I figured this is something I should know and understand. I wrote this article thinking some of you may not know as well. So, let me share with you what I learned. It’s really pretty simple at a high level.

What is a recession?

A recession is a significant decline economic activity, lasting more than a few months (many believe 2 months), and generally measured using real gross domestic product (GDP). Real GDP measures the size of a the U.S. economy. Put simply, GDP is the total value in dollars of all goods and services produced within the boundaries of a country in a given period. I use this definition in the context of the U.S. only, as while at a high level the definitions of a recession are common from country to country, the details in how the determination is made vary greatly.

Recessions can be associated with many different things in our economy, including:

  • Sharply rising prices (inflation)
  • Falling prices (deflation)
  • Declines of employment
  • Declines of investing
  • Declines of overall corporate profits

Severe or long running recessions are called depressions. There is no particular agreement on how “long running” is defined nor is the distinction between a depression and a recession really definitive. A severe depression, or significantly high inflation (commonly called hyper inflation) is called an economic collapse. The text book example of this is the 1929 stock market crash here in the U.S. A decline in GDP over more than 10% is generally considered a depression.

Is the U.S. in a recession?

By definition no, as we haven’t seen a quarter with a reduction in GDP. GDP for first quarter of 2008 is .6%. GDP for 4th quarter 2007 was also .6%. While we may be experiencing very slow to stagnant growth, our economy overall hasn’t declined.

Are we headed for a recession here in the U.S.? Possibly. Many financial analysts believe the economic stimulus package will keep the GDP from declining. Of course just as many think it won’t help at all.

With overall product prices skyrocketing, gas prices rising, housing and stock markets on the decline, we definitely seem to be heading in the direction of a recession. Most economists believe the next quarter will be the deciding factor on whether we head into recession or make a positive turn towards economic growth.

Here are some articles from my blogroll I think you’ll enjoy as well:

What are your thoughts on the possible recession? Do you think this is good or bad overall for our economy? Did you directly experience the recession in the early 80’s? How did it impact you? What did you do to get through? Are you doing anything to prepare for a possible recession? If so what?

14 Responses (including trackbacks) to “What is a recession?”

  1. nowaywalker Says:

    The recession is inevitable to slacken. It cannot go on forever. The question is who wins and who loses. Of course, the greates suffering will be experienced by ordinary people. Growing rates for credit and mortgages will leave an imprint on housholds’ finances

  2. Dan Says:

    I always enjoyed the following definition by Harry Truman:
    A recession is when your neighbor loses his job. A depression is when you lose yours!

    The real trouble with calling a recession is they can only be seem in hindsight. We apparently weren’t in a recession in Q1 2008. We may or may not be in one now. If you work in the real estate or financial services business, you might as well be in a recession. If you work in an export business, you’re in a boom.

    Overall, the economy should be all right in 2008. In 2009-10, inflation will certainly be a bigger problem than recession. We’ll see how it all plays out.

  3. Trent Hamm Says:

    A lot of people are really worried about Carter-era stagflation – high gas prices, rampant inflation, and recession all baked up together in one happy cake.

  4. Ron@TheWisdomJournal Says:

    For it to be a real recession, shouldn’t the economy at least contract a little? Just a tiny amount? So far, it hasn’t.

    For the first quarter
    Consumer spending up $20 billion
    Business expenditures down $2 billion
    Inventories up $20 billion
    Government expenditures up $10 billion
    Housing down $32 billion
    Exports up $7 billion

    The recession is hitting people in housing, but not in spending. So much for the HELOC and the super upgraded kitchen or mega expensive bathroom addition.

    It looks to me that with 95% employment, growth in GDP, and moderate inflation (the Fed just cut rates again), there is no recession except in the minds of the media who have been clamoring for one for about a year now.

  5. FFB Says:

    My understanding of a recession is when GDP declines for two quarters or when actual GDP is below potential GDP. I’m not sure that we’ve met those requirements. The low Fed rates can indicate that the Fed wants to pump more money into the economy to keep GDP up. The cost of this can be higher inflation (higher output leads to higher inflation).

    If we were to enter a recession then that would at least lower inflation. At the very least I would expect Fed rates to go up once things settle a bit in the economy which would also help inflation (and those of us with high-yield bank accounts).

    A bit part of what is happening may be high oil prices which causes prices to go up and can prevent production from growing fast. If this is primarily caused by oil prices then we’re really not in a recession. The question then is whether the prices are temporary or permanent. In the early 80’s we had a recession that was put into place by the Fed in order to control high inflation.

  6. Make Friends, Earn Money Says:

    recessions are a way of life and they come and go but for some reason we all seem surprised when one comes around. I suppose we become blind to the prospect of them when the good times are here. I think your summary and overview of what a recession is was excellent and I like the links to other posts

  7. castocreations Says:

    It drives me bonkers that the media keeps throwing this word around without knowing what the heck they are talking about. And then it becomes a self fulfilling prophesy. They’ve been down on the economy since 2000. Even when we were having excellent economic results. Could we head into a recession – of course. But it’s all part of the economic cycle. I blame the media for people’s depressing tone when thinking of the future.

  8. "Mo" Money Says:

    The media are playing their part in the slowing of the economy. Does anyone remember when Johnny Carson announced on The Tonight Show there was a shortage of toilet paper? He was right because everyone was afraid of a shortage and rushed out to buy toilet paper. I’ve read that a recession would be good for our country, and we should let it happen.

  9. Curious Cat Economics Blog Says:

    A recession is not hardly different from really slow growth. There is no change like water at 1 degree celsius versus -1 degree celsious. The news media acts like it is though.

    Instead there is a pretty gradual gradation between -1% growth and 1% growth. -1% is a recession. 1% is not. The economy is not much different in any noticeable way, though. .6% growth is pretty slow (and pretty weak). But really it is amazing it was doing that well given all the problems.

    The stimulus package is worthless as an economic tool. It is just politicians increasing the taxes even more on our grandchildren to try and distract from their failures to legislate sensibly.

  10. Steward Family of 5 Says:

    Here’s a link to a short video hosted by Drew Carey. He’s not the first person I would go to for finacial advice, but this video is amazing to see what is in the news vs. how people are actually living.

  11. Debt Free Revolution Says:

    *raises hand* I am the stagflation person, Trent. I would also like to caution everyone about trusting initial numbers from the government. If you wait 6 months, they are always revised. Also, the current numbers aren’t making sense. In April, the BLS says the country lost a net 20,000 jobs, yet unemployment went DOWN. I’m trying to find an explanation for a phenomenon like this and haven’t quite found an official one.

    Also, inflation is higher than the numbers reported to the media, since the BLS made major changes to their methodolgy in 1983 and again in 1998. This means comparisons to previous time periods to point out “it ain’t as bad as…” are no longer valid.

    People talk about revisionist history, but no one is really discussing revisionist economics which seems to impact a whole lot more folks.