America's Poor and the Great Recession

Chapter 1. The Great Recession: Definition, Duration, and Impact

1 The Great Recession Definition, Duration, and Impact A recession is an overall slowdown in economic activity in a geographic region, as opposed to a slowdown in sales by a particular company or in a specific industry sector. The key measures of economic activity are Gross Domestic Product (GDP), income, employment , industrial production, and sales of goods at the wholesale and retail levels. The GDP is a measure of the overall value of goods and services produced by the economy. It is widely watched by market actors to determine whether the economy is expanding or shrinking. Countries around the world vary in how a recession is defined and who is empowered to make the determination. In the United Kingdom, for example, recessions are generally defined by the government with a strict numeric definition: two consecutive quarters— or a total of six months—of negative growth in GDP constitutes a recession. The term “negative growth” means that the overall size of the economy is actually declining rather than increasing, as is typical of a healthy economy. In the United States, the definition of recession has some degree of subjectivity because a committee of economists is tasked with determining whether there has been “a significant decline in economic activity spread across the economy, lasting more than a few months.”1 Since 1920, this determination has been made by the National Bureau of Economic Research (NBER), a private nonprofit research organization based in Cambridge, Massachusetts. The NBER “Business Cycle Dating Committee” looks at a variety of economic indicators (not GDP 6 · america’s poor and the great recession alone) and determines when a decline in economic activity occurred, whether it was “significant” (in severity), and—if a recession has occurred —when a recession ended. The number of months from when the economy began to decline (starting from its peak) to when the economy started to recover (the trough- its lowest point) is the duration of the recession. According to the determinations of NBER, 17 recessions in the United States have occurred since World War I (see Table 1). They range in duration from six months (January to July 1980) to 43 months in the case of the Great Depression (August 1929 to March 1933).2 When a recessionary economy reaches its trough and the next expansion begins, the economy usually expands for at least several years. There is only one case in modern U.S. history of a double-dip recession, meaning that the economy began to expand and then slipped back into recession (January 1980 to July 1980; July 1981 to November 1982). Some analysts refer to this period loosely as the recession of 1980–1982. Changes in the unemployment rate, though watched closely by politicians as well as economists, are not used in defining when a recession begins and ends. When an economy is growing and is nearing its peak, the rate of decline in the unemployment rate actually tends to slow and the rate may even rise a bit, before the economy reaches its peak size (measured by GDP). At this stage of the business cycle, the unemployment rate is a “leading” indicator of where the economy is headed. On the other hand, the unemployment rate also acts as a “lagging” indicator when a recession ends because unemployment continues to rise after the official recovery has begun. Thus, the hardships induced by a recession, often measured by the amount and duration of unemployment, occur in the aftermath of the recession as well as during the official recessionary period. In general terms, contractions in the modern U.S. economy appear to be related to one or more of six types of “shocks”: oil prices, monetary policy, productivity, uncertainty, liquidity-financial risk, and fiscal policy. Recessions tend to be more severe when the economy is subjected to multiple shocks rather than only one. Market analysts sometimes talk about “shocks” and the “business cycle,” including peaks and troughs, as if it can be predicted the great recession · 7 Table 1. U.S. Business Cycle Expansions and Contractions, 1920-2007. Contractions (recessions) start at the peak of a business cycle and end at the trough. Business Cycle Reference Dates* Duration in Months Peak Trough Expansion** Contraction*** January 1920 (I) July 1921 (III) 10 18 May 1923 (II) July 1924 (III) 22 14 October 1926 (III) November 1927 (IV) 27 13 August...