RECESSION INTRODUCTION

In economics, a recession is a business cycle contraction. It is a general slowdown in economic activity. Macroeconomic indicators such as GDP (Gross Domestic Product), investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

DEFINITION
In a 1975 New York Times article, economic statistician Julius Shiskin suggested several rules of thumb for defining a recession, one of which was "two down consecutive quarters of GDP". In time, the other rules of thumb were forgotten. Some economists prefer a definition of a 1.5% rise in unemployment within 12 months. In the United States, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions. The NBER defines an economic recession as: "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." Almost universally, academics, economists, policy makers, and businesses defer to the determination by the NBER for the precise dating of a recession's onset and end. In the United Kingdom, recessions are generally defined as two consecutive quarters of negative economic growth, as measured by the seasonal adjusted quarter-on-quarter figures for real GDP. The exact same recession definitions apply for all member states of the European Union. TYPES OF RECESSION The type and shape of recessions are distinctive. In the US, V-shaped, or short-and-sharp contractions followed by rapid and sustained recovery, occurred in 1954 and 199091; U-shaped (prolonged slump) in 197475, and W-shaped, or double-dip recessions in 1949 and 198082. Japans 199394 recessions was U-shaped and its 8-out-of-9 quarters of contraction in 199799 can be described as L-shaped. Korea, Hong Kong and South-east Asia experienced U-shaped recessions in 199798, although Thailands eight consecutive quarters of decline should be termed L-shaped.

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PSYCHOLOGICAL ASPECTS Recessions have psychological and confidence aspects. For example, if the expectation develops that economic activity will slow; firms may decide to reduce employment levels and save money rather than invest. Such expectations can create a self-reinforcing downward cycle, bringing about or worsening a recession. Consumer confidence is one measure used to evaluate economic sentiment. The term animal spirits has been used to describe the psychological factors underlying economic activity. Economist Robert J. Shiller wrote that the term "...refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people."

PREDICTORS
Although there are no completely reliable predictors, the following are regarded to be possible predictors. Inverted yield curve, the model developed by economist Jonathan H. Wright, uses yields on 10-year and three-month Treasury securities as well as the Fed's overnight funds rate. Another model developed by Federal Reserve Bank of New York economists uses only the 10year/three-month spread. It is, however, not a definite indicator; the three-month change in the unemployment rate and initial jobless claims. Index of Leading (Economic) Indicators (includes some of the above indicators). Lowering of asset prices, such as homes and financial assets, or high personal and corporate debt levels.

GOVERNMENT RESPONSES
Most mainstream economists believe that recessions are caused by inadequate aggregate demand in the economy, and favor the use of expansionary macroeconomic policy during recessions. Strategies favored for moving an economy out of a recession vary depending on which economic school the policymakers follow. Monetarists would favor the use of expansionary monetary policy, while Keynesian economists may advocate increased government spending to spark economic growth. Supply-side economists may suggest tax cuts to promote business capital investment. When interest rates reach the boundary of an interest rate of zero percent (zero interest-rate policy) conventional monetary policy can no longer be used and government must use other measures to stimulate recovery. Keynesians argue that fiscal policy, tax cuts or increased government spending, will work when monetary policy fails. Spending is more effective because of its larger multiplier but tax cuts take effect faster. For example, Paul Krugman wrote in December 2010 that significant, sustained government spending was necessary because indebted households were paying down debts and unable to carry the U.S. economy as they had previously: "The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble...highly indebted Americans not
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only cant spend the way they used to, theyre having to pay down the debts they ran up in the bubble years. This would be fine if someone else were taking up the slack. But whats actually happening is that some people are spending much less while nobody is spending more and this translates into a depressed economy and high unemployment. What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained.

STOCK MARKET
Some recessions have been anticipated by stock market declines. In Stocks for the Long Run, Siegel mentions that since 1948, ten recessions were preceded by a stock market decline, by a lead time of 0 to 13 months (average 5.7 months), while ten stock market declines of greater than 10% in the Dow Jones Industrial Average were not followed by a recession. The real-estate market also usually weakens before a recession. However real-estate declines can last much longer than recessions. Since the business cycle is very hard to predict, Siegel argues that it is not possible to take advantage of economic cycles for timing investments. Even the National Bureau of Economic Research (NBER) takes a few months to determine if a peak or trough has occurred in the US. During an economic decline, high yield stocks such as fast moving consumer goods, pharmaceuticals, and tobacco tend to hold up better.\However when the economy starts to recover and the bottom of the market has passed (sometimes identified on charts as a MACD), growth stocks tend to recover faster. There is significant disagreement about how health care and utilities tend to recover. Diversifying one's portfolio into international stocks may provide some safety; however, economies that are closely correlated with that of the U.S. may also be affected by a recession in the U.S. There is a view termed the halfway rule according to which investors start discounting an economic recovery about halfway through a recession. In the 16 U.S. recessions since 1919, the average length has been 13 months, although the recent recessions have been shorter. Thus if the 2008 recession followed the average, the downturn in the stock market would have bottomed around November 2008. The actual US stock market bottom of the 2008 recession was in March 2009.

POLITICS
Generally an administration gets credit or blame for the state of economy during its time. This has caused disagreements about when a recession actually started. In an economic cycle, a downturn can be considered a consequence of an expansion reaching an unsustainable state, and
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is corrected by a brief decline. Thus it is not easy to isolate the causes of specific phases of the cycle. The 1981 recession is thought to have been caused by the tight-money policy adopted by Paul Volcker, chairman of the Federal Reserve Board, before Ronald Reagan took office. Reagan supported that policy. Economist Walter Heller, chairman of the Council of Economic Advisers in the 1960s, said that "I call it a Reagan-Volcker-Carter recession. The resulting taming of inflation did, however, set the stage for a robust growth period during Reagan's administration. Economists usually teach that to some degree recession is unavoidable, and its causes are not well understood. Consequently, modern government administrations attempt to take steps, also not agreed upon, to soften a recession.

IMPACTS Unemployment
Unemployment is particularly high during a recession. Many economists working within the neoclassical paradigm argue that there is a natural rate of unemployment which, when subtracted from the actual rate of unemployment, can be used to calculate the negative GDP gap during a recession. In other words, unemployment will never reach 0 percent and thus is not a negative indicator of the health of an economy unless it is above the "natural rate," in which case it corresponds directly to a loss in gross domestic product, or GDP.

The full impact of a recession on employment may not be felt for several quarters. Research in Britain shows that low-skilled, low-educated workers and the young are most vulnerable to unemployment in a downturn. After recessions in Britain in the 1980s and 1990s, it took five years for unemployment to fall back to its original levels. Many companies often expect employment discrimination claims to rise during a recession.

Business
Productivity tends to fall in the early stages of a recession, then rises again as weaker firms close. The variation in profitability between firms rises sharply. Recessions have also provided opportunities for anti-competitive mergers, with a negative impact on the wider economy: the suspension of competition policy in the United States in the 1930s may have extended the Great Depression.

Social effects
The living standards of people dependent on wages and salaries are more affected by recessions than those who rely on fixed incomes or welfare benefits. The loss of a job is known to have a negative impact on the stability of families, and individuals' health and well-being.

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