Some economists prefer a definition of a 1. The NBER defines an economic recession as: In the United Kingdom , recessions are generally defined as two consecutive quarters of negative economic growth, as measured by the seasonal adjusted quarter-on-quarter figures for real GDP. These summary measures reflect underlying drivers such as employment levels and skills, household savings rates, corporate investment decisions, interest rates, demographics, and government policies. Koo wrote that under ideal conditions, a country's economy should have the household sector as net savers and the corporate sector as net borrowers, with the government budget nearly balanced and net exports near zero.
Policy responses are often designed to drive the economy back towards this ideal state of balance. Type of recession or shape[ edit ] Main article: Recession shapes The type and shape of recessions are distinctive. In the US, v-shaped, or short-and-sharp contractions followed by rapid and sustained recovery, occurred in and —91; U-shaped prolonged slump in —75, and W-shaped, or double-dip recessions in and — For example, if companies expect economic activity to slow, they may reduce employment levels and save money rather than invest.
Such expectations can create a self-reinforcing downward cycle, bringing about or worsening a recession. Shiller wrote that the term " When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people. Balance sheet recession High levels of indebtedness or the bursting of a real estate or financial asset price bubble can cause what is called a "balance sheet recession.
The term balance sheet derives from an accounting identity that holds that assets must always equal the sum of liabilities plus equity. If asset prices fall below the value of the debt incurred to purchase them, then the equity must be negative, meaning the consumer or corporation is insolvent.
Economist Paul Krugman wrote in that "the best working hypothesis seems to be that the financial crisis was only one manifestation of a broader problem of excessive debt--that it was a so-called "balance sheet recession. Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do.
Japanese firms overall became net savers after , as opposed to borrowers. Koo argues that it was massive fiscal stimulus borrowing and spending by the government that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy.
However, Krugman argued that monetary policy could also affect savings behavior, as inflation or credible promises of future inflation generating negative real interest rates would encourage less savings. In other words, people would tend to spend more rather than save if they believe inflation is on the horizon.
In more technical terms, Krugman argues that the private sector savings curve is elastic even during a balance sheet recession responsive to changes in real interest rates disagreeing with Koo's view that it is inelastic non-responsive to changes in real interest rates. Both durable and non-durable goods consumption declined as households moved from low to high leverage with the decline in property values experienced during the subprime mortgage crisis. Further, reduced consumption due to higher household leverage can account for a significant decline in employment levels.
Policies that help reduce mortgage debt or household leverage could therefore have stimulative effects. In theory, near-zero interest rates should encourage firms and consumers to borrow and spend. However, if too many individuals or corporations focus on saving or paying down debt rather than spending, lower interest rates have less effect on investment and consumption behavior; the lower interest rates are like " pushing on a string.
One remedy to a liquidity trap is expanding the money supply via quantitative easing or other techniques in which money is effectively printed to purchase assets, thereby creating inflationary expectations that cause savers to begin spending again. Government stimulus spending and mercantilist policies to stimulate exports and reduce imports are other techniques to stimulate demand.
Too many consumers attempting to save or pay down debt simultaneously is called the paradox of thrift and can cause or deepen a recession. Economist Hyman Minsky also described a "paradox of deleveraging" as financial institutions that have too much leverage debt relative to equity cannot all de-leverage simultaneously without significant declines in the value of their assets. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged.
Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year. A process of balance sheet deleveraging has spread to nearly every corner of the economy.
Consumers are pulling back on purchases, especially on durable goods, to build their savings. Businesses are cancelling planned investments and laying off workers to preserve cash. And, financial institutions are shrinking assets to bolster capital and improve their chances of weathering the current storm. Once again, Minsky understood this dynamic.
He spoke of the paradox of deleveraging, in which precautions that may be smart for individuals and firms—and indeed essential to return the economy to a normal state—nevertheless magnify the distress of the economy as a whole. Wright, uses yields on year and three-month Treasury securities as well as the Fed's overnight funds rate.
It is, however, not a definite indicator;  The three-month change in the unemployment rate and initial jobless claims.
Stabilization policy Most mainstream economists believe that recessions are caused by inadequate aggregate demand in the economy, and favor the use of expansionary macroeconomic policy during recessions. Strategies favored for moving an economy out of a recession vary depending on which economic school the policymakers follow. Monetarists would favor the use of expansionary monetary policy , while Keynesian economists may advocate increased government spending to spark economic growth. Supply-side economists may suggest tax cuts to promote business capital investment.
When interest rates reach the boundary of an interest rate of zero percent zero interest-rate policy conventional monetary policy can no longer be used and government must use other measures to stimulate recovery. Keynesians argue that fiscal policy —tax cuts or increased government spending—works when monetary policy fails. Spending is more effective because of its larger multiplier but tax cuts take effect faster.
For example, Paul Krugman wrote in December that significant, sustained government spending was necessary because indebted households were paying down debts and unable to carry the U. This would be fine if someone else were taking up the slack. What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained In Stocks for the Long Run , Siegel mentions that since , ten recessions were preceded by a stock market decline, by a lead time of 0 to 13 months average 5.
There is significant disagreement about how health care and utilities tend to recover. In the 16 U. Thus if the recession followed the average, the downturn in the stock market would have bottomed around November The actual US stock market bottom of the recession was in March Politics[ edit ] Generally an administration gets credit or blame for the state of economy during its time. Thus it is not easy to isolate the causes of specific phases of the cycle. The recession is thought to have been caused by the tight-money policy adopted by Paul Volcker , chairman of the Federal Reserve Board, before Ronald Reagan took office.
Reagan supported that policy. Economists usually teach that to some degree recession is unavoidable, and its causes are not well understood. Consequently, modern government administrations attempt to take steps, also not agreed upon, to soften a recession. Unemployment[ edit ] Unemployment is particularly high during a recession. Many economists working within the neoclassical paradigm argue that there is a natural rate of unemployment which, when subtracted from the actual rate of unemployment, can be used to calculate the negative GDP gap during a recession.
In other words, unemployment never reaches 0 percent, and thus is not a negative indicator of the health of an economy unless above the "natural rate," in which case it corresponds directly to a loss in gross domestic product, or GDP. You may improve this article , discuss the issue on the talk page , or create a new article , as appropriate. August Learn how and when to remove this template message The full impact of a recession on employment may not be felt for several quarters.
Research in Britain shows that low-skilled, low-educated workers and the young are most vulnerable to unemployment  in a downturn. After recessions in Britain in the s and s, it took five years for unemployment to fall back to its original levels. The variation in profitability between firms rises sharply. Recessions have also provided opportunities for anti-competitive mergers , with a negative impact on the wider economy: The loss of a job is known to have a negative impact on the stability of families, and individuals' health and well-being.
Fixed income benefits receive small cuts which make it tougher to survive.