Term Paper on "Differences in Economic Slowdowns and Recessions"

Term Paper 6 pages (2660 words) Sources: 6 Style: APA

[EXCERPT] . . . .

Economic Slowdowns and Recessions

Macroeconomic concept defines recession as a decline in the GDP during two successive quarters which is a short period of depression. NBER's definition of recession is a situation that is marked by a massive reduction in the overall economic activity present for more than a few months. Some economists are of the view that when the natural growth rate in the GDP is less than the average of 2%, the economy is in the grip of a recession. Recessionary trends have been witnessed in the U.S. economy where several indicators have demonstrated the fact. These are fall in real GDP, real incomes, employment opportunities, wholesale retail and industrial production rates.

Introduction:

According to latest data, the U.S. is presently under the grip of a recessionary trend ahead which is to continue at least for four quarters instead than the mild recession which majority of the forecasters are presently predicting. There has been a decline in employment rates in January; extremely high and higher levels of initial and continued unemployment claims, a non-manufacturing ISM which declined, the Philly Fed report and a host of other forward looking indicators being in recession. There has been a fall in real terms retail sales during the holiday season, far from average results and declining sales for the majority of retailers in January, plummeting auto sales. Besides, there has been very weak and increasingly declining consumer confidence, a credit crunch which is assuming to be more severe in credit market as calibrated by a variety of credit spreads, the onset of a severe recession in commercial real estate, recessionary trends in the housing sector, abruptly dropping home prices, demonstrated effect of a serious credit crisis within the banking system based on the Fed survey of loan officers. Also there has been a correction in every stock markets and the starting of a bear market in the NASDAQ. (Roubini, 2008)

III. Thesis:

While the macroeconomic definition of recession centers on falling GDP during two successive quarters, the NBER bases its concept of recession on major slump in economic activity present for more than a few months.

A a) Macroeconomic definition of economic recession and its difference from economic slowdown:

According to the macroeconomic concept, recession is considered as a drop in the national Gross National Product -- GDP during two consecutive quarters. A prolonged recession is called an economic slowdown. In other words, a depression is a condition wherein the economy has fallen and is unable to recover. A short period of recession is sometimes known as economic recession. But in the opinion of popular theorists John Kenneth Galbraith there is no practical distinction between the three types of recession, save the desire to discount the threat of a panic. The policy indirect by the present definition, inclusive of the consideration of the significance of Gross National Product to welfare of the people, or the desirability or the need of reporting by quarter-years, are confronted in some theories of a wider political economy comprising of voting, market, and other activities. Economic shocks are mostly the cause of recessions. The biggest global recession which mankind has ever witnessed was the onset of the Great Depression during the late 1920s and 1930s. Other important recessions to have gripped the economy are the two oil crises during the 1970s and the Long Depression of the 19th century. The sharpest recession documented is considered which started after the First World War when most parts of Europe were hit by hyperinflation. However, this recession lasted for a short period. ("Recession- macroeconomics," n. d.) b) NBER definition of economic recession and its difference from economic slowdown:

The 'National Bureau of Economic Research - NBER' defines recession in a bit more vague terms compared to the macroeconomics concept. According to the NBER's definition, recession is condition marked by a major decline in economic activity lasting for greater than a few months. According to some economists, the economy finds itself in a grip of recession when the natural growth rate in the GDP is less than the average of 2%. ("What is recession?," n. d.)

IV) Applicable aspects of theory of business cycles:

The "National Bureau's Business Cycle Dating Committee keeps a history of the U.S. business cycles. The history identifies the dates of highs and lows that shape economic recession or expansion. The period from the crest to a trough constitute a recession and the period from a trough to a crest is considered to be an expansion. As per the chronology, the latest peak happened in March 2001, putting an end to an unprecedented long expansion which started in 1991." ("NBER's Recession Dating Procedure," 2003) and the most recent downturn came to an end during November 2001. The applicable aspects of theory of business cycles defines "recession as a marked slowdown in economic activity spread across the economy, staying for more than a few months, usually seen in real income, GDP, employment, industrial production, and wholesale retail sales. A recession unfolds immediately after the economy attains a crest of activity and ends with the economy reaching a trough. In between the tough and crest the economy remains in an expansion phase. Expansion happens to be the normal state of the economy. Almost all recessions lasts for a brief period and their number have come down recently." ("NBER's Recession Dating Procedure," 2003)

Business Cycles happen exclusively in communities having an exclusively modern type of economic organization is clearly identified by a lot of writers and is also implied by everybody who are able to track these cycles to institutional causes of latest development. Besides, the theories which look for alternatives to physical causes are not required to be taken as dissenting opinions. Whatever the cycles that happen in the weather generate cycles in economic activities in cases where economic activities are organized on a business basis. This dependence of business cycles on specific scheme of institutions should be a reality on a specific scheme of institutions must be reality of the highest theoretical importance. But the lesson depends on the understanding of the institutional scheme in question. (Mitchell, 1954)

The phases of business cycles to which the terms crisis and recessions are applied have been seen to experience an overall drop in prices, a change of comparative value and a downward readjustment of a huge volume of creditor claims. The acuteness of these deflationary processes changes from one cycle to the next, being impacted by all the forces at play in the cyclical fluctuations of business. Their nature as well as the outcomes changes also, with the changes in economic organization. But with an intense burden of fixed expenses, considering the more broad debt structure, with a monetary economy which penetrates more intensely into the daily activities of people, an overall deflation and the readjustments it involves might be anticipated to put greater strains on the economic system. This is not to state the causal forces, in case it is able to be found, essentially change from time to time. Different reactions to these forces might be anticipated as the organization and also the operating features of the system at large have been amended over the years. Due to this, a survey of some aspects of the latest recession comes as a special interest. (Mills, 1936)

V) the U.S. is currently in recession or slowdown by whose definition:

The U.S. is currently is in a phase of recession by NBER's definition. As a recession impacts by and large the overall economy of a nation and does not remain confined to a particular sector, the NBER's Committee lays importance on "economy-wide measures of economic activity. The Committee views real GDP as the one ideal measure of total economic activity. The Committee emphasizes on two monthly estimates of activity throughout the entire economy." ("NBER's Recession Dating Procedure," 2003) These are (i) personal income from which transfer payments have been "deducted in real terms and (ii) employment. Besides, the Committee points out to the two indicators with coverage mainly on manufacturing and goods." ("NBER's Recession Dating Procedure," 2003) These are "(i) industrial production and (ii) sales volume of the manufacturing and the wholesale retail sectors adjusted for the price changes." ("NBER's Recession Dating Procedure," 2003)

According to the figures released by the Bureau of Economic Analysis for GDP that revealed three quarters of negative growth in the 1st, 2nd and 3rd quarters of 2001 in which the earlier data had revealed just the third quarter as negative. To confirm, "The Committee does not rely on a simple thumb rule as two back to back quarters of negative growth, nor depends as such on the GDP data while making its conclusions, but instead observes at an extensive range of statistics. During November 2001, the Committee found out the date of the peak in activity in March 2001 by means of its normal indicators. The two-quarter slump rule of thumb would have permitted the declaration of the recession till Aug 2002, leaving… READ MORE

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