Skip to main content

What is a Recession?

According to the National Bureau of Economic Research (NBER), an economic recession is a period when a significant decline in economic activity spreads across the economy and can last from a few months to more than a year. Generally speaking, recessions are recurring economic phenomena which are characterized by a slow-down in economic activity. Recessions occur routinely, but unpredictably, due to the cyclical nature of the world economy. The duration of a recession can only be identified in hindsight, but the experience of living through one is easily identifiable.

The most recent recession in 2008-2009 was also the most severe in many decades. Not surprisingly, the impact from this contraction is still being felt throughout the global economy. Common events that accompany a recession include layoffs, a declining stock market, slowing economic activity, falling consumer confidence, and an interest rate lowering cycle used by the Federal Reserve to artificially stimulate economic activity (e.g. increase demand for lending products to fund expansionary business plans). Understanding the process of a recession can be overwhelming but as Albert Einstein said, “Everything should be made as simple as possible, but no simpler.”

Taking Einstein’s lead, it can help to visualize economic cycles as waves with each wave representing a period of distinct economic activity. Based on NBER’s perspective, a recession is the time period from the peak of one wave to the trough of the next wave. During this period in which the wave falls, general economic indicators will be declining too. Conversely, the expansion or recovery (i.e. opposite of recession) arises from the trough to the apex of the following wave and is accompanied by increasing values for economic data. At the peak, economic indicators, like the stock market, consumer confidence and spending, will be higher than the previous trough when the last recession ended. After a top, the subsequent wave will begin to fall and eventually trough before the next wave up. Again, this slowing period in the economy leading up to the trough (i.e. a falling wave) is the recession. This is a perpetual, yet irregular, cycle.

At this point you may be wondering if we are always in a recession or expansion. While there are some transition periods around the crest and trough of the economic cycle between leading, coincident and lagging indicators, based on the NBER’s interpretation there can only be two phases of economic activity: Expansion or Recession.

For investors and savers it is important to be able to identify the current point in the economic cycle as this will impact your financial decisions like taking out a loan, buying a house, looking for or taking a new job, or deciding where to invest your savings. Taking a quick glance at recent stock market prices and interest rates is a good starting point that every investor can do.   


From a historical perspective, recessions are a transitory contraction in economic activity. You as an investor should make an effort to understand the cyclical nature of an economy as it ebbs and flows between recession and recovery as this will be beneficial in managing your financial matters.  

As always, if you have questions or comments, feel free to send me a message. Thanks for reading.


JD
Labels:

Comments

Post a Comment

Popular posts from this blog

Budgeting Tips from Jim Rohn

For those unfamiliar, the late Jim Rohn was one of leading minds in the business coaching and personal development field. His work covers topics such as business strategy, time management, goal attainment, and personal finance. Rohn’s book “7 Strategies for Wealth and Happiness” contains a plethora of useful, applicable tactics that can dramatically improve your lifestyle through creating paradigm shifts in mindset and actions. He spends a portion of the book discussing an outline for managing a budget.  Specifically, Rohn calls it his 70/30 Rule. The premise is simple to follow and easy to implement. First, you start with your after-tax net earnings each month and multiply that value by 70%. Expenses for the month should not exceed this number (i.e. 70% of net wages). Second, subtract this expense target from after-tax monthly income and you will have 30% remaining. Lastly, this 30% is to be divided evenly into thirds. Rohn advises that the first third (10% of after-tax earn
2 comments
Read more

5 Things I Learned from Mom about Money

In light of Mother’s Day I thought it would be helpful to reflect and impart some of the financial wisdom my mother shared with me. These quick, simple nuggets of advice continue to prove useful as I navigate adulthood. 1. Create a budget Soon after graduating college I was able to secure an investment job in the region I wanted. However, this required that I move out of home and begin living on my own. Facing this new chapter in my life, my mother took time to write out a budget  with me detailing my cash inflows versus outflows and determined how much I could expect to have left over. She emphasized that the key was to have something left over each month to  save   or invest   while still living comfortably. Overall, I learned that a budget is nothing more than a road map that helps you maintain control of your finances. 2. Maintain a healthy savings reserve Growing up I did various jobs during my summer breaks from school. During this time my mother instilled in me
1 comment
Read more

How the Wealthy Think

We all know these people. They seem to have an endless amount of money as evident in the way they live, what they own, the places they go on a whim, and by the topics of their conversations. But what are some of the distinguishing characteristics between the truly wealthy and regular people? Moreover, how can regular folks like us who aspire to attain this level of financial freedom make these aspirations a reality? Below are a few key ingredients to understanding how to acquire a mindset for wealth accumulation. First, the wealthy are owners of their assets. From my work experience in wealth management, most high net worth (HNW) investors have acquired wealth through owning a family business. For those of us not born into a family with its own enterprise, you can still think like an owner at your place of employment. As you progress through the corporate ranks your compensation package will begin to include a number of additional income opportunities. For example, corporate e
Post a Comment
Read more