Economists have classified historical periods in terms of the dates when economic activity peaked before entering a period of decline at least since the work of Wesley Mitchell about a century ago. A trough is the lowest point on the way down, and the period between the peak and the trough is known as an economic recession. The graph below depicts Buffett’s chosen metric, real GDP per person. It is represented on a logarithmic scale, with a change of 10 units on the vertical axis roughly corresponding to a 10% change in real GDP per capita. Vertical lines on the graph reflect NBER dates for business cycle peaks and troughs.
According to conventional wisdom, the recession ends when the economy begins to recover again, not when it has rebounded to the point that metrics like real GDP per person have reached new all-time highs. The latter criteria would always give you a later date than the genuine low point for economic activity, and a significantly later date in the case of a deep downturn and sluggish recovery like the one we’ve just experienced.
Are Warren Buffett and the common-sense Americans on whose behalf he claims to speak within their rights to suggest that economists have been using the term “recession” inappropriately for the past 150 years or so of data? I would argue that they are very much justified in having an opinion on this, because the events that economists label as recessions are universally understood to affect the economy. People are aware that they are still not back to where they were, and the statistics back this up. When economists say the recession is finished, however, they never claim that things have returned to normal.
So, in part, it’s just a semantic issue with how a term is defined. Economists use the term “recession” to refer to a tightly defined occurrence, whereas many others understandably want to be able to discuss the long-term effects of the event.
But I believe there is more to this than a semantic issue here: economists say the recession, as we use the term, has been over for more than a year because conditions have been steadily improving rather than worsening. True, conditions haven’t improved as much as we’d hoped and expected, and they haven’t improved enough to put us back where we were before the recession, but conditions have been steadily improving rather than worsening.
And that is a crucial truth that is often overlooked in the mainstream discussion of these concerns.
What triggers the end of a recession?
A lack of company and consumer confidence causes economic recessions. Demand falls when confidence falls. A recession occurs when continuous economic expansion reaches its peak, reverses, and becomes continuous economic contraction.
When does a recession come to an end?
A recession is a large drop in overall economic activity that lasts for a long time. Unemployment rises and real income falls during recessions.
Since 2006, every FRED series of US data has featured the option to display shaded areas on the graph to illustrate the peaks and troughs of business cycles, as dated by the National Bureau of Economic Research (NBER).
The NBER’s Business Cycle Dating Committee assigns a lag of several months to the start of each recession and an even longer lag to the end of a recession: business cycle peaks are announced an average of 7.8 months after their dating, and business cycle troughs are announced an average of 15.8 months after their dating, according to the NBER.
Any new information is rapidly updated in the FRED database. On the FRED graph above, the recession that began in February 2020 is now visible. The apex of the business cycle is denoted by a bar set on February 1, 2020 in graphs containing data at a daily frequency. It is indicated as a vertical line in graphs with monthly data.
Because FRED is unable to predict when the recession will finish, the graph is colored from February 2020 onward. However, if you want to predict when the current recession will end (before the NBER issues an official statement), examine these FRED series: Marcelle Chauvet and Jeremy Piger’s recession likelihood index and the real-time Sahm Rule Recession Indicator. The recession has most certainly ended when the recession likelihood index has significantly fallen or the Sahm indicator has peaked. Check the FRED data on a frequent basis to ensure you get the good news as soon as possible.
Search for “10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity” and broaden the period range to include the recession that lasted from December 3, 2007 to June 3, 2009.
What are the five reasons for a recession?
In general, an economy’s expansion and growth cannot persist indefinitely. A complex, interwoven set of circumstances usually triggers a large drop in economic activity, including:
Shocks to the economy. A natural disaster or a terrorist attack are examples of unanticipated events that create broad economic disruption. The recent COVID-19 epidemic is the most recent example.
Consumer confidence is eroding. When customers are concerned about the state of the economy, they cut back on their spending and save what they can. Because consumer spending accounts for about 70% of GDP, the entire economy could suffer a significant slowdown.
Interest rates are extremely high. Consumers can’t afford to buy houses, vehicles, or other significant purchases because of high borrowing rates. Because the cost of financing is too high, businesses cut back on their spending and expansion ambitions. The economy is contracting.
Deflation. Deflation is the polar opposite of inflation, in which product and asset prices decline due to a significant drop in demand. Prices fall when demand falls, as sellers strive to entice buyers. People postpone purchases in order to wait for reduced prices, resulting in a vicious loop of slowing economic activity and rising unemployment.
Bubbles in the stock market. In an asset bubble, prices of items such as tech stocks during the dot-com era or real estate prior to the Great Recession skyrocket because buyers anticipate they will continue to grow indefinitely. But then the bubble breaks, people lose their phony assets, and dread sets in. As a result, individuals and businesses cut back on spending, resulting in a recession.
Is there going to be a recession in 2021?
The US economy will have a recession, but not until 2022. More business cycles will result as a result of Federal Reserve policy, which many enterprises are unprepared for. The decline isn’t expected until 2022, but it might happen as soon as 2023.
How do you know when a recession is approaching?
Real gross domestic product (GDP), or goods produced minus inflationary impacts, is the economic measure that most clearly identifies a recession. Income, employment, manufacturing, and wholesale retail sales are some of the other major indicators. Each of these areas suffers a drop during a recession.
Gross Domestic Product (GDP)
The overall value generated by an economy (via goods and services produced) in a specific time period, adjusted for inflation, is referred to as real GDP. A sharp reduction in productivity is shown by a negative real GDP.
Real income
Personal income is measured, adjusted for inflation, and social security benefits such as welfare payments are discounted to arrive at real income. The purchasing power of a person is reduced when their real income falls.
Manufacturing
The strength and self-sufficiency of an economy are measured by the manufacturing sector’s health, which takes into consideration overall exports/imports and trade deficits (or surpluses) with other countries.
How long do economic downturns last?
A recession is a long-term economic downturn that affects a large number of people. A depression is a longer-term, more severe slump. Since 1854, there have been 33 recessions. 1 Recessions have lasted an average of 11 months since 1945.
With an example, what is recession?
There have been five such periods of negative economic growth since 1980, all of which were classified as recessions. The worldwide recession that followed the 2008 financial crisis and the Great Depression of the 1930s are two well-known examples of recession and depression. A depression is a severe and long-term economic downturn.