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Updated on July 10, 2020 , 4265 views

What is a Recession?

A recession is defined as two consecutive quarters of negative Gross Domestic Product (GDP) growth. In simple terms, it means that that GDP declines for two three-month periods in a row, or that the output of the economy shrinks. But, the National Bureau of Economic Research, which decides the official timing of expansions and recessions, defines recession as "a recurring period of decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy." Thus, along with the length of the decline, its breadth and depth are also considerations in determining an official recession.


Macroeconomic Components of Recessions

The standard macroeconomic definition of a recession is two consecutive quarters of negative GDP growth. Private business, which had been in expansion prior to the recession, scales back production and tries to limit exposure to systematic risk. Measurable levels of spending and investment are likely to drop and a natural downward pressure on prices may occur as aggregate demand slumps.

Microeconomic Components of Recessions

At the microeconomic level, firms experience declining margins during a recession. When revenue, whether from sales or investment, declines, firms look to cut their least-efficient activities. A firm might stop producing low-margin products or reduce employee compensation. It might also renegotiate with creditors to obtain temporary interest relief. Unfortunately, declining margins often force businesses to fire less productive employees.

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Recession Incidence

A good example is the Great Recession. There were four consecutive quarters of negative GDP growth in the last two quarters of 2008 and the first two quarters of 2009.

The recession quietly started in the first quarter of 2008. The economy contracted slightly, only 0.7 percent, rebounding in the second quarter to 0.5 percent. The economy lost 16,000 jobs in January 2008, the first major job loss since 2003. That's another sign the recession was already underway.

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