Recession

There are several ways to define a recession. The most commonly quoted definition is two consecutive quarters of declining real GROSS DOMESTIC PRODUCT (GDP). The “cocktail party” definition is “when your neighbor is unemployed but you still have your job.” The NATIONAL BUREAU OF ECONOMIC RESEARCH (NBER) Business Cycle Dating Committee is the ultimate arbiter of when recessions and expansions take place. The NBER defines a recession as “a recurring period of decline in total output, INCOME, EMPLOYMENT, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy.” This definition depends on how much of a decline, how long it lasts, and how many sectors in the economy are declining. The Business Cycle Dating Committee thus looks at the three Ds: depth, duration, and dispersion of an economic downturn. Recessions comprise the contraction phase in BUSINESS CYCLES, the normal ups and downs of business activity in an economy. Unlike a depression, which is a severe, prolonged period of economic contraction, a recession usually lasts for less than a year. A “growth recession” is a period of slow growth (but not decline) in total output, income, employment, and trade, usually lasting a year or more. Defining when a recession begins and ends is a difficult but important task. The NBER is a nonpartisan, nonprofit economic-research organization whose mission is to provide unbiased economic research among public policymakers, business professionals, and the academic community. Much to the dissatisfaction of Nobel Prizewinning economist Milton Friedman, the NBER defined the downturns in 1980–81 as two separate recessions. Some Reagan administration members wanted the period defined as one recession so it could be attributed to the Carter administration. The defeat of President George H. W. Bush in 1992 is largely attributed to the economic decline preceding the election. The NBER found the recession actually ended in March 1991, well before the election, but voters perceived a recession was still taking place in November. Government leaders naturally want to intercede to counteract or minimize the impact of a recession. FISCAL POLICY and MONETARY POLICY can be used to stimulate economic activity. AUTOMATIC STABILIZERS (UNEMPLOYMENT and WELFARE benefits) help reduce the impact of falling incomes during a recession. In the period from World War II to the end of the century, there were seven recessions.