Recession is a term used to signify a slowdown in general economic activity. In macroeconomics, recessions are officially recognized after two consecutive quarters of negative GDP growth rates. In the U.S., they are declared by a committee of experts at the National Bureau of Economic Research (NBER).
Recessions are considered a part of the natural business/economic cycle of expansion and contraction. An economy starts to expand at its trough (weakest point) and starts to recede after reaching its peak (highest point). A deep recession that lasts for a long time eventually translates into a depression. In the early 1900s, the Great Depression lasted several years and witnessed a GDP decline in excess of 10%, with unemployment rates peaking at 25%.
Indicators of a Recession
1. Gross Domestic Product (GDP)
Real GDP indicates the total value generated by an economy (through goods and services produced) in a given time frame, adjusted for inflation. Negative real GDP indicates a sharp drop in productivity.
2. Real income
Real income is calculated by measuring personal income, adjusting it for inflation, and discounting social security measures such as welfare payments. A decline in real income reduces purchasing power.
3. Manufacturing
The health of the manufacturing sector, taking into account overall exports/imports and trade deficits (or a trade surplus) with other countries, signifies the strength and self-sufficiency of an economy.
4. Wholesale/Retail
Both wholesale and retail sales, adjusted for inflation, are also measured to gauge the market performance of goods.
5. Employment
A high rate of unemployment is a lagging indicator. It typically confirms an economy’s pivot into a recession stage rather than predicting a recession in the future. Usually, unemployment rates nearing 6% of the total workforce are considered problematic.
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