Getty Images
Stocks rebounded Friday after steep losses earlier this week, but the markets remained on track for their worst week in two years. That’s fueling fears that a recession could be on the horizon.To be clear, even with the recent market plunge, which removed $5 trillion worth of value in three weeks, the U.S. is not yet in a recession……Continue reading….
BY Chris Morris
Source: Inc
.
Critics:
Some recessions have been anticipated by stock market declines. In Stocks for the Long Run, Siegel mentions that since 1948, ten recessions were preceded by a stock market decline, by a lead time of 0 to 13 months (average 5.7 months), while ten stock market declines of greater than 10% in the Dow Jones Industrial Average were not followed by a recession.The real estate market also usually weakens before a recession.
However, real estate declines can last much longer than recessions. Since the business cycle is very hard to predict, Siegel argues that it is not possible to take advantage of economic cycles for timing investments. Even the National Bureau of Economic Research (NBER) takes a few months to determine if a peak or trough has occurred in the US.
An administration generally gets credit or blame for the state of the economy during its time in office; this state of affairs has caused disagreements about how particular recessions actually started.
For example, the 1981 recession is thought to have been caused by the tight-money policy adopted by Paul Volcker, chairman of the Federal Reserve Board, before Ronald Reagan took office. Reagan supported that policy. Economist Walter Heller, chairman of the Council of Economic Advisers in the 1960s, said that “I call it a Reagan-Volcker-Carter recession.”
Unemployment is particularly high during a recession. Many economists working within the neoclassical paradigm argue that there is a natural rate of unemployment which, when subtracted from the actual rate of unemployment, can be used to estimate the GDP gap during a recession. In other words, unemployment never reaches 0%, so it is not a negative indicator of the health of an economy, unless it exceeds the “natural rate”, in which case the excess corresponds directly to a loss in the GDP.
The full impact of a recession on employment may not be felt for several quarters. After recessions in Britain in the 1980s and 1990s, it took five years for unemployment to fall back to its original levels. Employment discrimination claims rise during a recession. Productivity tends to fall in the early stages of a recession, then rises again as weaker firms close. The variation in profitability between firms rises sharply.
The fall in productivity could also be attributed to several macro-economic factors, such as the loss in productivity observed across the UK due to Brexit, which may create a mini-recession in the region. Global epidemics, such as COVID-19, could be another example, since they disrupt the global supply chain or prevent the movement of goods, services, and people. Recessions have also provided opportunities for anti-competitive mergers, with a negative impact on the wider economy; the suspension of competition policy in the United States in the 1930s may have extended the Great Depression.
The living standards of people dependent on wages and salaries are less affected by recessions than those who rely on fixed incomes or welfare benefits. The loss of a job is known to have a negative impact on the stability of families, and individuals’ health and well-being. Fixed income benefits receive small cuts which make it tougher to survive. According to the International Monetary Fund (IMF), “Global recessions seem to occur over a cycle lasting between eight and 10 years.”
The IMF takes many factors into account when defining a global recession. Until April 2009, IMF several times communicated to the press, that a global annual real GDP growth of 3.0% or less in their view was “equivalent to a global recession”. By this measure, six periods since 1970 qualify: 1974–1975, 1980–1983, 1990–1993, 1998, 2001–2002, and 2008–2009.
During what IMF in April 2002 termed the past three global recessions of the last three decades, global per capita output growth was zero or negative, and IMF argued—at that time—that because of the opposite being found for 2001, the economic state in this year by itself did not qualify as a global recession.
In April 2009, IMF had changed their Global recession definition to “A decline in annual per‑capita real World GDP (purchasing power parity weighted), backed up by a decline or worsening for one or more of the seven other global macroeconomic indicators: Industrial production, trade, capital flows, oil consumption, unemployment rate, per‑capita investment, and per‑capita consumption.”
By this new definition, a total of four global recessions took place since World War II: 1975, 1982, 1991 and 2009. All of them only lasted one year, although the third would have lasted three years (1991–1993) if IMF as criteria had used the normal exchange rate weighted per‑capita real World GDP rather than the purchase power parity weighted per‑capita real World GDP.
The United States housing market correction (a consequence of the United States housing bubble) and subprime mortgage crisis significantly contributed to a recession. The 2007–2009 recession saw private consumption fall for the first time in nearly 20 years. This indicated the depth and severity of the recession. With consumer confidence so low, economic recovery took a long time. Consumers in the U.S. were hit hard by the Great Recession, with the value of their houses dropping and their pension savings decimated on the stock market.
U.S. employers shed 63,000 jobs in February 2008, the most in five years. Former Federal Reserve chairman Alan Greenspan said on 6 April 2008 that “There is more than a 50 percent chance the United States could go into recession.” On 1 October, the Bureau of Economic Analysis reported that an additional 156,000 jobs had been lost in September. On 29 April 2008, Moody’s declared that nine US states were in a recession. In November 2008, employers eliminated 533,000 jobs, the largest single-month loss in 34 years.
In 2008, an estimated 2.6 million U.S. jobs were eliminated. The unemployment rate in the U.S. grew to 8.5% in March 2009, and there were 5.1 million job losses by March 2009 since the recession began in December 2007. That was about five million more people unemployed compared to just a year prior, which was the largest annual jump in the number of unemployed persons since the 1940s.
Although the US economy grew in the first quarter by 1%, by June 2008 some analysts stated that due to a protracted credit crisis and “rampant inflation in commodities such as oil, food, and steel”, the country was nonetheless in a recession.The third quarter of 2008 brought on a GDP retraction of 0.5%, the biggest decline since 2001. The 6.4% decline in spending during Q3 on non-durable goods, like clothing and food, was the largest since 1950.
A November 2008 report from the Federal Reserve Bank of Philadelphia based on the survey of 51 forecasters, suggested that the recession started in April 2008 and would last 14 months. They projected real GDP declining at an annual rate of 2.9% in the fourth quarter and 1.1% in the first quarter of 2009. These forecasts represented significant downward revisions from the forecasts of three months prior.
A December 2008 report from the National Bureau of Economic Research stated that the U.S. had been in a recession since December 2007, when economic activity peaked, based on several measures including job losses, declines in personal income, and declines in real GDP. By July 2009, a growing number of economists believed that the recession may have ended.
The National Bureau of Economic Research announced on 20 September 2010 that the 2008/2009 recession ended in June 2009, making it the longest recession since World War II. Prior to the start of the recession, it appears that no known formal theoretical or empirical model was able to accurately predict the advance of this recession, except for minor signals in the sudden rise of forecasted probabilities, which were still well under 50%…
Leave a Reply