It was a long time coming but finally everyone agrees we are in a recession. Questions such as: what is a recession; why are we in one; how long have we been in one; how will we get out and how long will it take us to get out; are difficult to answer definitively.
A recession is a general slowdown in economic activity that lasts over a period of time. Usually a recession can be identified by how certain key economic indicators change behavior. Household incomes, investing, production, inflation and business profits fall while unemployment and bankruptcies increase. All businesses go through periods of growth and retraction when a large enough percentage of businesses are going through a retraction at the same time it can trigger a recession if the rest of the economy isn’t health. Sometimes, an economic bubble bursting can cause a recession.
A business may go into a retracting phase for any of the following reasons: the market for its product might have reached the saturation point for the price it must be sold for a growth spurt might have necessitated hiring a lot of new workers with the result of too low a percentage of seasoned workers to operate efficiently It might have overextended its self and become to highly leveraged.
An economic bubble may develope when a sector of the economy quickly increases in value and a rush of investors causes that sector to experience wildly inflated prices. A small downturn in the economy, a rumor, or act of nature may trigger some investors to jump ship and the price drops quickly wiping out investors.
Whatever the reason, when a business finds it needs to retract, the business will cut expenses in order to regroups. During a recession companies whose business is not in a downturn may do everything possible to cut expenses until the economy cycles into a more favorable phase or they may us the recession as an opportunity to expand their market share.
The public responds to a recession by cutting back on spending; to what degree they do so will depend on how bad they perceive the recession to be and how long they think it will last. It could be argued that recessions aren’t caused by businesses going into safe mode so much as the general public’s reaction to the actions of business.
How a government responds to a recession depends on which school of economic theory is favored by those in charge.
Monetarists believe in an expansionary monetary policy while Keynesian economists favor increased government spending. Supply-side economists advocate tax cuts and Laissez-faire economics suggest doing nothing and letting the natural market forces work things out. (Laissez-faire, while a legitimate economic school of thought, never the less, seems like a cop out. One studies economics and then come away with “just leave things alone and let them sort them selves out”. Does that not seem like a waste of education?)
Finally we ask, how long will this recession last? That is the big question and the answer is; no one knows. In 1954 and in 1990-91 the U.S. suffered V-shaped (short and sharp) recessions which were followed by quick and sustained recoveries. Unfortunately, this looks more like a U-shaped (prolonged) or W-shaped (double dipped) recession. This recession is generally considered to have started in December of 2007 although it was a year before it was officially announced that the U.S. was in a recession.
A recession officially starts when there has been negative real economic growth for a least two consecutive quarters but because of the time lag in determining GDP the country can be in a recession for months before it can be made official. A recession usually lasts 6 to 16 months which means this one isn’t average as it has already lasted 26 months. Hopefully this one will bottom out soon and a recovery will start.