While there is some difference of opinion among “experts” when the subject of recession comes up, people who are out of work or losing a home have no doubts about it. It all depends on which definition you decide to use.
For most economists and financial-industry observers, a recession occurs when a nation’s Gross Domestic Product is moving in a negative direction, as opposed to growing. According to the official designation, this must take place over two consecutive fiscal quarters (six months).
Most people are aware of coming problems long before a recession becomes official. The overall economy begins to slow down – employers let workers go, they spend less money, businesses don’t advertise as much and so on. It’s interesting that economists have tracked a few months of positive GDP growth just before most of these economic slow-down periods start.
In the past couple of decades some economists have started to question the “official” definition of a recession. They emphasize that basing the designation only on GDP might be misleading. Other facts should be included, these economists insist – unemployment, consumer spending and the hard-to-measure level of confidence among consumers.
The National Bureau of Economic Research (NBER) is the agency designated to declare a recession. This federal agency uses a slightly more nebulous definition for recession that includes the phrase “a few months.” But the result is generally the same. When the economy is slipping “backwards” for a significant period of time, a country might be in a recession.
As mentioned earlier, the man-on-the-street and the buyer of groceries often know that tough times are coming. In fact, by the time the NBER gives U.S. citizens the official notice, the economy might have been stalled or moving in a negative direction for weeks. It’s the nature of federal agencies to be just a bit behind the curve in this case because agency staff must analyze a lot of information before they feel confident enough to make a declaration.
Some economists and financial analysts point out that periods of mild recession or economic slow-down are common. Basically, there are going to be periods of “up” activity and periods of “down” activity. The real problem arises when the economic stall or negative direction lasts for several months. According to economists, these extended periods go beyond the necessary adjustments for increased spending and times of faster-than-normal growth.
If several of the factors (GDP, unemployment etc.) have a negative direction and combine to create real problems over time, a recession is underway. Severe negative movement and extremely long periods like this may actually lead to depression. If consumer confidence and spending stops completely for a long time, such as was the case in the 1930s, a Great Depression occurs. This takes the economic situation far beyond a recession.
According to Wikipedia, a recession not only involves negative GDP and unemployment but also involves investment, use of commercial capacity (stores, manufacturing facilities) and rate of bankruptcy. Economists and financial analysts attempt to pinpoint factors leading to a recession but admit there can be intangible factors as well.