Growing Economy

In a growing economy, consumer demand is increasing, overall, more than it is decreasing. Since there is increasing demand, producers want to increase supply. To do this, producers have to increase their consumption of other goods and services, including labor. This means there is greater demand for labor, so the labor pool, on the whole, can raise the price of their product (in other words, people can get paid more for their work).

Working people with higher incomes have more money to spend on other products, which increases demand even more. If demand is high enough, the price of some things goes up. For example, if there are more travelers than there are seats on airplanes, airlines can raise their prices to decrease demand (this could lead to high inflation if it happened across the board, but in the past decade the U.S. economy has shown the ability to grow steadily while keeping inflation under control). In a growing economy, some consumers and producers will not do well, but most will, so the general feeling about the economy is good.

In such an economy, a lot of consumers tend to make investments: They buy things, such as stock in a company, that they plan to sell at a later date. They know that if the economy keeps going the way it has been, their investments will increase in value. These consumers figure they will make money just by holding onto the product for a while.

History has proven that an economy will not keep expanding indefinitely -- eventually it will contract for a while. A prolonged period of contraction is known as a recession. If the recession lasts long enough, and is particularly severe, it is known as a depression. In the next section, we'll find out what happens in this sort of economy.

NBER ; United States Recession Criteria

In the US, the judgment of the business-cycle dating committee of the National Bureau of Economic Research regarding the exact dating of recessions is generally accepted. The NBER has a more general framework for judging recessions:

The 2001 recession was announced by the NBER in November 2001[9], which later turned out to be the truth. Thus the recession ended the month it was announced by the NBER. In July 1981 the NBER declared an end to a six-month recession from January to July 1980, the last year of Jimmy Carter's presidency. For the 1981-82 recession, which was during President Reagan's first term, the NBER announced the July 1981 peak in January 1983, and the November 1982 trough in July 1983.[10]

Economist Robert J. Gordon, a member of the NBER committee has stated that any announcement about the start of a new recession starting in 2008 is unlikely before the last few months of 2008 at the earliest[11].

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. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

Because of the way a recession is defined, the beginning (peak in the economic cycle) or end (trough) of a recession can only be identified after the change in the trend has been present for several months.

Recession; Supply and Demand

In a market, the actions of producers and consumers determine the value of goods and services. Producers are the ones who actually set prices, but they do so based on the behavior of consumers. If nobody buys a product at a particular price, the producer knows the price is too high. If some consumers buy it, but not enough to buy everything produced, producers must either decrease the price or decrease the supply.

The ultimate goal of producers is to make money -- to bring in more money than they spent producing the product. Consumers may want to satisfy their wants and needs by buying products, or they may buy products in order to make money (by reselling the products or by using the products to produce other products). In any case, consumers generally want to pay as little for goods and services as they can.

The willingness of consumers to pay for products is known as demand. Even if there is constant high demand for a product (toilet paper, for example), individual producers need to keep the price down or consumers will just buy it from a competitor.

Predictors of a Recession

In a market economy, or a modified market economy such as the U.S. economy, production and consumption are connected in various "markets." A market is simply a place where consumers can go to buy things from producers and producers can go to sell things to consumers.
A grocery store is an example of a physical market. People who want to consume food go to the grocery store and buy it from producers through a series of middlemen. The store itself is one of the middlemen, and there are usually others along the way (distribution companies, for example). The labor market is a more abstract sort of market. In this market, businesses who want to consume work pay people to produce labor. In the stock market, consumers and producers buy and sell percentages of ownership of companies (see How Stocks and the Stock Market Work for more information).

As you can see, almost everybody is both a producer and a consumer acting in more than one market. If you have a job, you are a producer of labor. Whenever you go shopping, you are a consumer of goods.

There are no totally reliable predictors. These are regarded to be possible predictors.[3]

Stock market drops have preceded the beginning of recessions. However about half of the drops of 10% or more since 1946 have not resulted in recessions.[4] Also, approximately half of the stock market decline came after the beginning of recessions.

Inverted yield curve,[5] the model developed by Fed economist Jonathan Wright, uses yields on 10-year and three-month Treasury securities as well as the Fed's overnight funds rate. Another model developed by Federal Reserve Bank of New York economists uses only the 10-year/three-month spread.

It is, however, not a definite indicator;[6] it is sometimes followed by a recession 6 to 18 months later.


The three-month change in the unemployment rate and initial jobless claims.[7]
Index of Leading (Economic) Indicators (includes some of the above indicators).[8]

Attributes of Recessions

Broadly speaking, a nation's economy is the production and consumption of goods (food, clothes, cars) and services (repairs, lawn-mowing, haircuts) in that nation. Anybody producing or consuming things in a country (and that's just about everybody) plays some role in the economy.

­Production and consumption are intertwined. In order for people to consume things, someone has to produce those things. And in order to produce things, you need to consume things (you need to consume natural resources and people's labor, for example).

A recession may involve simultaneous declines in coincident measures of overall economic activity such as employment, investment, and corporate profits. Recessions may be associated with falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as stagflation. A severe or long recession is referred to as an economic depression. Although the distinction between a recession and a depression is not clearly defined, it is often said that a decline in GDP of more than 10% constitutes a depression.[2] A devastating breakdown of an economy (essentially, a severe depression, or hyperinflation, depending on the circumstances) is called economic collapse.

Money Makes the World Go Round

­A recession is a prolonged period of time when a nation's economy is slowing down, or contracting. Such a slow-down is characterized by a number of different trends, including:

• People buying less stuff
• Decrease in factory production
• Growing unemployment
• Slump in personal income
• An unhealthy stock market

By the conventional definition, this slow-down has to continue for at least six months to be considered a recession.

 

This definition really raises more questions than it answers.

• What does it mean for the economy to slow down?
• Why does this happen?
• How are all these factors related?

And what exactly is "the economy"?

People talk about the U.S. economy as an independent entity, but it is actually the result of millions of people's actions. Economists use all kinds of esoteric terms to describe the connection between people's actions and the economy as a whole. But you can understand the basic idea of this connection by looking at only a few basic concepts: producers, consumers, markets, supply and demand.

How Recessions Work

What actually constitutes a recession? Who decides when the economy is in recession, and on what grounds? When a nation's economy enters a recession, is life guaranteed to get harder for most of its citizens? And how often does a recession lead to a depression?

On Nov. 26, 2001, the news media announced the United States was officially in a recession and had been since March of that year. To most Americans, this wasn't all that surprising: Rising unemployment and a weak stock market had been in the news for months.

­On Jan. 21, 2008, stock prices tumbled around the world. Most analysts pointed to fears surrounding the United States economy and a possible recession as the reason for the drop. Ironically, economic conditions in the United States were affecting the world economy on a day when its own markets weren't even in session -- they were closed for the Martin Luther King Jr. Day holiday. Three days later, news outlets were already reporting a new economic stimulus package, designed in part to try to prevent a recession.

Both the 2008 market drop and the 2001 news blitz raised a lot of questions.