What does the term “recession” mean and how do we know when one occurs?
The term "recession" refers to a significant decline in economic activity within a country, typically measured by a decrease in gross domestic product (GDP) for two consecutive quarters. It is a period of economic contraction, characterized by reduced production, employment, and income.
To determine when a recession occurs, economists analyze various economic indicators. Here are a few commonly examined indicators:
1. Gross Domestic Product (GDP): GDP measures the total value of goods and services produced within a country. If GDP declines for two consecutive quarters, it suggests a recession may be underway.
2. Unemployment Rate: Rising unemployment often accompanies a recession. As businesses slow down or shut down, they may lay off workers, resulting in increased unemployment.
3. Business Investment: During a recession, businesses tend to reduce their investments in equipment, technology, and expansion due to lower consumer demand and uncertainty.
4. Consumer Spending: When people become cautious about their economic prospects, they may cut back on spending, particularly on non-essential items, leading to a decline in consumer spending.
5. Industrial Production: A decrease in industrial production indicates reduced demand for manufactured goods, reflecting an economic slowdown.
6. Stock Market: Stock market indices, such as the S&P 500 or Dow Jones Industrial Average (DJIA), may experience a significant decline during a recession as investors anticipate lower profits for companies.
To officially declare a recession, government agencies or central banks often rely on expert analysis and a comprehensive evaluation of these indicators, and not just the GDP decline. Monitoring these indicators helps economists and policymakers to recognize and respond to economic downturns, aiding in the implementation of appropriate measures to stimulate the economy.