WHAT IS A RECESSION?
In economics, the term economic recession is generally used to describe a situation in which a country's GDP, or gross domestic product, sustains a negative growth factor for at least 2 consecutive quarters. Being that the United States is the leader when it comes to consumption of goods and services; an economic recession here will send shockwaves across the world, creating a global recession. The only way to truly recession proof your portfolio during a severe global recession is to move your money to cash or US treasury instruments.
Just as there is an agency to define the measure of inflation; the official agency in charge of declaring an economic recession is the National Bureau of Economic Research (NBER). NBER's definition of recession is a bit vaguer than the standard one that was described above; they define recession as a "significant decline in economic activity lasting more than a few months". For this reason, the official designation of recession may not come until after we are in a recession for six months or even longer.
We provided the loose definition of the term economic recession above because it is defined differently by different economists. Some economists also suggest that an economic recession occurs when the natural growth rate in GDP is less than the average of 2%.
Typically, a normal recession lasts for approximately 1 year.
Causes of Economic RecessionThis is another staunchly debated topic; but the general consensus is that a recession is primarily caused by the actions taken to control the money supply in the economy. The Federal Reserve is responsible for maintaining an ideal balance between money supply, interest rates, and inflation. When the Fed loses the balance in this equation, the economy can spiral out of control, forcing it to correct itself. This is precisely what we have seen in 2007, where the Feds monetary policy of injecting tremendous amounts of money supply into the money market has kept interest rates low and inflation edging higher. Combine this with the relaxed lending policies which made it easy to borrow money and you have economic activity which becomes unsustainable, resulting in the economy coming to a near halt.
It is also said that economic recession can be caused by factors that stunt short term growth in the economy, such as spiking oil prices or war. However, these are mostly short term in nature and tend to correct themselves in a quicker manner than the full blown recessions that have occurred in the past.
Effects of Economic RecessionAn economic recession can usually be spotted before it happens. There is a tendency to see the economic landscape changing in quarters preceding the actual onset. While the growth in GDP will still be present, it will show signs of sputtering and you will see higher levels of unemployment, decline in housing prices, decline in the stock market, and business expansion plans being put on hold.
When the economy sees extended periods of economic recession, the economy can be referred to as being in an economic depression.