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Economic News, Data and Analysis

Recession: Definition

A Recession is typically defined as an overall slowing of economic activity. Since there are many measures of economic activity as well as what constitutes a “slowing,” there can be many definitions of what exactly constitutes
a recession. The National Bureau of Economic Research (NBER), a non-profit organization which assigns dates to the beginning and end of downturns, defines a recession as “a period of declining output and employment.”

One common and often cited definition of the beginning of a recession is two
consecutive quarters of decline in real GDP. Whether one uses this rigid
definition or another definition based on a more comprehensive examination
of the various measures of the macroeconomy is largely a matter of personal
taste – there’s nothing magical about either definition.

In reality the economy can and does move at various speeds, not just at a
pace defined by the on/off of a boom or recession. It is usually better
to look more deeply at the underlying data directly.

Output.
Usually the total output of the economy is measured as Gross Domestic Product
(GDP).
However, since GDP is measured only every quarter, other measures must
be used to get more specific timing of a business cycle peak. Industrial
production (IP)
as measured monthly by the Federal Reserve takes this role in the NBER’s
determination of business cycle
dates
.

Employment.
Recessions are usually associated with periods of declining employment
as well as output. When output is declining, firms have less need to employ
workers, and this translates to fewer people employed and a rise in the unemployment rate.

Duration.
Recessions can be of various durations. Since 1945 (through 1992), the average recession has lasted 11 months.

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Filed under: Recession

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