On Your Mark, Get Set… Recession!!

January 21, 2008

Accounting & Finance, Business

There seem to be a vast number of technical definitions for the word ‘Recession.’  Although most of the financially based definitions seem to be more centered around GDP, they all reflect negatively.  The best definition I found to match our current situation is “the state of the economy declines; a widespread decline in the GDP; and employment and trade lasting from six months to a year.”

We haven’t been in a large recession since 1970.  Although 2008 isn’t officially a recession yet, with unemployment rising and stocks falling, many economists say we probably are.  The official statement comes from the National Bureau of Economic Research, a non-profit group based in Cambridge, Massachussets.  Why them?  Well the NBER was founded in 1920 consists of about 600 economists.  The NBER is the nation’s leading nonprofit economic research organization. Sixteen of the 31 American Nobel Prize winnters in Economics and six of the past Chairmen of the President’s Council of Economic Advisers have been researchers at the NBER. The more than 600 professors of economics and business now teaching at universities around the country who are NBER researchers are the leading scholars in their fields. These Bureau associates concentrate on four types of empirical research: developing new statistical measurements, estimating quantitative models of economic behavior, assessing the effects of public policies on the U.S. economy, and projecting the effects of alternative policy proposals.

So how long are they?  According to the NBER, there have been 32 recessions since 1854, lasting an average of 17 months. Recessions have gotten shorter and less frequent since 1945, averaging just 10 months. And the two last recessions were among the shortest and mildest on record; both the 1990-1991 downturn and the 2001 recession lasted just eight months.

A common misconception is getting recession and depression confused.  True, there is no universally agreed upon definition between the two.  I remember an old joke from my economics class, “a recession is where your neighbor loses his job, and a depression is when you lose your job.”  A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.

So what happens next?  Truthfully, nothing.  Be thankful for whatever you have.  A recession or depression doesn’t mean everyone is going to become homeless.  It just means that the country, as a whole, is having a hard time.  Remember, what goes up, must come down, and eventually up again.  The good thing about recessions is that it will cure inflation.  Now the government must try to stimulate the economy as much as possible through lowering taxes, spending on social programs and ignoring current account deficits.

So sit back, try not to do anything risky, and wait for some relief!

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