Economic Recessions Come and Go as Business Cycles Ebb and Flow

The recent recession of global proportions, although many would claim that we are continuing to endure hard economic times, has been one of the severest on record, especially in the developed countries of the world. By its simplest definition, a recession is a general slowdown in economic activity, but the formal definition from the perspective of an economist states that GDP growth must be negative for two successive quarters. Some economists prefer to embellish further that unemployment must also rise 1.5% over a twelve-month period, but most would agree that people lose jobs, overall spending is reduced, and more people than normal struggle to make ends meet.

In our country, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is viewed as the appointed authority for assigning dates for U.S. recessions. The NBER posits a more definitive description of a recession as "a significant decline in economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales." It came as a surprise to many when the latest recession was deemed over in June of 2009.

A recession, however, is a necessary component of the general business cycle as illustrated in the following diagram:



















Over time as the population increases and new people enter the work force, an economy will grow according to normal supply and demand forces.As we learned in high school physics, forces in nature produce waves, and economic forces are no exception to this natural law. As the chart depicts, a natural sine wave is generated with peaks and troughs, connected by periods of recession and recovery.

Over the past one hundred years, there have been no less than twenty recessions, an average occurrence of once every five years. The recent recession has been the longest on record since the Great Depression, lasting some 18 months in its official entirety. Now labeled the “Great Recession”, it still pales in comparison with the 55-month long depression in the early 1930’s.

Due to the dire consequences for the unprepared in our society, economists and public officials are especially sensitive to detecting early warning signs that a recessionary period may be imminent. Unemployment data and initial jobless claims are closely monitored, along with the Index of Leading Indicators. Investment yields on government securities are another early indicator, but “asset bubbles” of any type in the economy are the true harbingers of bad times ahead. An inevitable collapse will lead to reduced spending, thereby ensuring a material drop in economic activity.

The collapse of the real estate market, coupled with unbridled global investment in mortgage-backed securities, produced a systemic failure in two important sectors of our economy, namely housing and banking. The responsibility for preventing “asset bubbles” in a domestic economy rests with the respective central bank, but broad-based errors in judgment in financial institutions, regulatory bodies, and rating agencies rendered monetary policy solutions as ineffective in dealing with the problems at hand.

The impacts were global. Forex brokers were active due to extreme volatilities witnessed in currency markets. Opportunities abounded for those traders focused on forex scalping strategies, and the financial “ripples” from the crisis of 2008 are still evident today in forex markets around the world.

Recessions occur in a variety of types, distinguished by either their longevity or by the difficulty of their recoveries. Globalization has created an interconnected global economy, and it is nearly impossible to insulate one country’s economic wellbeing from that of its trading partners. The United States is still the largest global economy in the world, and the demand of its consumers for products continues to drive many of the export-based economies on the planet. Even China, now number two in the world, must align its goals with U.S. economic health.