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What is a Recession?

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Recession definitions (and fears) are running amuck. 

Encarta® World English Dictionary [North American Edition] © 2007 Microsoft Corporation.

1. decline in economic activity: a period, shorter than a depression, during which there is a decline in economic trade and prosperity


"Definition: A recession is defined to be a period of two quarters of negative GDP growth.

Thus: a recession is a national or world event, by definition. And statistical aberrations or one-time events can almost never create a recession; e.g. if there were to be movement of economic activity (measured or real) around Jan 1, 2000, it could create the appearance of only one quarter of negative growth. For a recession to occur the real economy must decline."

New York Times

"A recession is typically defined as an extended period in which the economy shrinks, leading to a rise in unemployment and a drop in consumer spending and business investment."

Is there a recession in our immediate future? 

We probably won't know for sure until the Business Cycle Dating Committee of the  National Bureau of Economic Research (NBER) issues a statement. NBER is considered the official agency for the measurement of business cycles in the U.S. and they make the determination on when a contraction (recession) officially begins and ends.  "Contractions (recessions) start at the peak of a business cycle and end at the trough."  The NBER definition for recession (contraction) is:

“a period of significant 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.”

NBER further states:

"The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP.  Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

Although the press often defines a recession as two consecutive quarters of decline in GDP, the two consecutive quarters of decline in real GDP is not used by NBER due to the fact that not all recessions identified by them have consisted of two quarters - most have, but not all.

Just like you have good days and bad days, our economy has good days and bad days as part of the normal business cycle.  Unfortunately, the 249 point drop the DJIA took on September 7, 2007 is a rather dramatic showing, but the financial markets are unusually skittish right now over the effects of the subprime mortgage failures and tighter credit policies, so we're probably going to have many market ups and downs over the next year. 

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