There’s a lot of debate about what a recession is and if the economy has met the criteria. Let’s look at what it is so we can better understand. There are many resources about the subject, but the ones I’m using here appear to be the best.
A recession is “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.” The encouraging word there is “temporary.” Nothing is forever, right? CNN published an article in 2008 which applies to today as well:
“A recession is a self-reinforcing downturn in economic activity, when a drop in spending leads to cutbacks in production and thus jobs, triggering a loss of income that spreads across the country and from industry to industry, hurting sales and in turn feeding back into a further drop in production… The proper definition of recession cannot be limited to GDP and industrial production but must also include jobs, income, and spending, spiraling down in concert… Just look for the “Three P’s” – a pronounced, pervasive, and persistent downturn in the broad measures of those factors.”
Forbes published an article about this subject which broke down the information quite well. Their list of things that can cause recessions are:
- A sudden economic shock: An economic shock is a surprise problem that creates serious financial damage. In the 1970s, OPEC cut off the supply of oil to the U.S. without warning, causing a recession, not to mention endless lines at gas stations. The coronavirus outbreak, which shut down economies worldwide, is a more recent example of a sudden economic shock.
- Excessive debt: When individuals or businesses take on too much debt, the cost of servicing the debt can grow to the point where they can’t pay their bills. Growing debt defaults and bankruptcies then capsize the economy. The housing bubble in the mid-aughts that led to the Great Recession is a prime example of excessive debt causing a recession.
- Asset bubbles: When investing decisions are driven by emotion, bad economic outcomes aren’t far behind. Investors can become too optimistic during a strong economy. Former Fed Chair Alan Greenspan famously referred to this tendency as “irrational exuberance,” in describing the outsized gains in the stock market in the late 1990s. Irrational exuberance inflates stock market or real estate bubbles—and when the bubbles pop, panic selling can crash the market, causing a recession.
- Too much inflation: Inflation is the steady, upward trend in prices over time. Inflation isn’t a bad thing per se, but excessive inflation is a dangerous phenomenon. Central banks control inflation by raising interest rates, and higher interest rates depress economic activity. Out-of-control inflation was an ongoing problem in the U.S. in the 1970s. To break the cycle, the Federal Reserve rapidly raised interest rates, which caused a recession.
- Too much deflation: While runaway inflation can create a recession, deflation can be even worse. Deflation is when prices decline over time, which causes wages to contract, which further depresses prices. When a deflationary feedback loop gets out of hand, people and business stop spending, which undermines the economy. Central banks and economists have few tools to fix the underlying problems that cause deflation. Japan’s struggles with deflation throughout most of the 1990s caused a severe recession.
- Technological change: New inventions increase productivity and help the economy over the long term, but there can be short-term periods of adjustment to technological breakthroughs. In the 19th century, there were waves of labor-saving technological improvements. The Industrial Revolution made entire professions obsolete, sparking recessions and hard times. Today, some economists worry that AI and robots could cause recessions by eliminating whole categories of jobs.
The National Bureau of Economic Research (NBER) studies everything economic and keeps track of the U.S. economy in a nonpartisan way. They are the in-house experts who keep an eye on financial things and have a wealth of information, including links to articles that can also be helpful. One is an article from the Washington Post concerning who decides if the U.S. is in a recession. Anyone can say, “we’re in a recession,” but these eight people are the official deciders. According to the article, “…the official pronouncement will ultimately come down to a little-known group of economists selected by the National Bureau of Economic Research called the “Business Cycle Dating Committee,” which stubbornly takes its time and tries to wall itself off from political interference or attempts to spin its findings.” This group’s description reminded me of the Entmoot talked about in Lord of the Rings and how they take their time and don’t proclaim anything too hastily.
Understanding economics can be complex, but a different article breaks down how a recession happens and explains it for those of us who aren’t economists. Understanding what’s going on and how it works is essential, but finding time to learn from a good source of information is challenging. A recession may be likely, but by learning about how it happens, we can perhaps prevent another.
By Gretchen Hendrick Gardella, MLIS
Gretchen Hendrick Gardella is a Librarian with administrative, research, and vast technical skills. Ms. Gardella brings over 16 years of experience working in academic and public libraries to the discussion.