What Happens During a Recession?
What Happens During a Recession?
A couple different formal definitions exist for a recession. Here are a few popular ones:
- Suggested by economic statistician Julius Shiskin in 1975, a recession is when the Gross Domestic Product (GDP) has two down quarters (i.e. shows negative growth for two consecutive quarters). Another way to look at this is that our currency ends up buying less in other parts of the world.
- Another definition of a recession is when national unemployment rises one and a half percent in a year’s time.
- The National Bureau of Economic Research (NBER) has their own version that most economists like more. This involves a look at more factors than just the GDP or the unemployment rate. Real income, wholesale-retail sales, and industrial production also factor into whether they decide a recession is going on or not.
- Leonard Lauder of Estee Launder Cosmetics once put forth that lipstick sales could be a good indicator of a recession. The theory behind this was that shoppers would put off big-ticket purchases but placate themselves with the purchase of lower priced makeup. Therefore, if lipstick sales are up, we might be in a recession.
A recession is a slow down in the economy. However, it is more than that, a downward spiral with a negative feedback loop; a recession can take some time to recover from. Here is what happens in a recession:
- Something causes a problem for banks. Some form of over-speculation or crisis happens where they now cannot loan out money like they usually do.
- Small businesses cannot get loans to start their businesses.
- Business stagnates. New people are not hired for new businesses.
- Unemployment goes up.
- People get scared and stop spending as much money as they usually do. Credit card application and usage drops.
- Businesses fail and have to lay off people.
- Home values and mortgage applications go down
- After about a 10% unemployment rate, normal people start to get affected by the recession (i.e. not people living on the margins).
- People will start to look for recession proof commodities to invest in.
To help get out of a recession, governments will usually try a couple of things:
- promote interest cuts to encourage consumer spending
- make tax cuts to give people more money to spend
- increase money supply
- increase government spending
A very strong argument exists that excessive government involvement actually makes recessions last longer. The Austrian School of Economics, for example, advocates a laissez faire approach to the economy. They believe that government involvement is counterproductive to recovering from a recession. The Chicago School of Economics also believes in libertarianism as far as economics are involved.
Harry S. Truman, 33rd president of the US (1884-1972) was quoted in the newspaper Observer on April 13, 1958, “It’s a recession when your neighbour loses his job; it’s a depression when you lose yours.”