Peter DeCaprio: How does an organization understand when a recession or depression is occurring in the economy?
An economic recession is a business cycle contraction that results in a general slowdown in economic activity. Macroeconomic indicators such as GDP growth, employment, household income, and retail sales fall while bankruptcies, unemployment rates, and credit spread rise. In other words, many factors contributing to the short-term growth of GDP will be negative during a period of economic depression. In the United States, these periods are called “recessions.” The National Bureau of Economic Research (NBER) uses various measures, including real GDP growth and unemployment, to judge when recessions begin and end.
Recession Indicators: Peter DeCaprio
One measure used by NBER is Business Cycle Expansions and Contractions based on peak number for real GDP.
This method uses the following list of indicators:
1. Real GDP
2. Percent Unemployed (U3)
3. Nonfarm Payroll Employment (000’s jobs)
4. Industrial Production Index (base 1967 = 100)
5. Consumer Price Index for All Urban Consumers (CPI-U, U.S.)
6. Interest Rates on three month Treasury Bills and 10-year treasury notes
7. Value of U.S. Dollar in terms of Yen and Euro or Swiss Francs (USD/JPY, EUR/USD).
8. The National Association of Purchasing Managers Index Services (Manufacturing Sector): ISM NONMANUFACTURING Business Activity Index and ISM MANUFACTURING Business Activity Index
9. Personal Income minus Transfer Payments (Individuals)
10. Industrial Production minus Manufacturing (Industrial Production – Manufacturing).
If GDP contracts for two consecutive quarters, it is considered a recession. If GDP growth falls below 0%, it is also considered a recession.
From the list of indicators, economists determine how much weight should be given to each indicator. For example, some may be more accurate predictors than others in determining whether an economy is headed into a recession or when it will end.
The history of recessions:
There have been eleven recessions in the United States since World War II and ten in Canada due to its close economic ties with the U.S.
The recession of 1974-75:
In 1973 a severe worldwide economic depression hit many nations hard. The United States suffered a sharp recession in which the Gross National Product declined by 5%. During this time, unemployment reached its highest level since World War II, exceeding 9%, and inflation remained high at about 7%. In 1975, the Federal Reserve eased credit to help stimulate the economy, and Congress passed several relief bills to try and ease the recession. Businesses also began spending again, which further added to economic growth. In March 1975, President Ford proposed tax relief for business investment to speed up production from 79 million to 83 million units within one year. Although inflation increased from 4% in 1971 to 11% in 1975, the joblessness and recessionary environment helped President Ford lose his election bid to Jimmy Carter in 1976.
The 2001 Recession:
After a short four-month expansion, the United States experienced its first economic recession since 1991. The twin towers disaster of September 11th triggered a sharp drop in consumer confidence and spending, which led to many U.S. businesses laying off employees as demand for their products decreased significantly. In turn, this further exacerbated unemployment as 19% were without jobs by November 2001, falling from its peak of 6% only months earlier. The Federal Reserve had lowered interest rates by one full percentage point to 1% by December.
What are the causes of the recession or depression? How does this economic backdrop affect consumer behaviour and spending habits? What can be done to overcome this economic situation?
This is just one example of how an organization that makes its living in the economy might need to learn more about what’s going on, who is affected, and what actions it could take. When facing these sorts of questions, organizations turn to economists for answers. Economists collect data on unemployment rates, income levels, inflation/deflation rates, government policies (e.g., stimulus programs), international trade tariffs, etc.
One notable economist is John Maynard Keynes. He developed “the aggregate demand-aggregate supply model,” which describes the relationship between demand, supply, and price. He won the Nobel Prize in Economics in 1946 for his efforts.
Another notable economist is Milton Friedman. He advocated “laissez-faire” economics where government involvement should be kept to an absolute minimum to let the free market determine prices, production, distribution, etc. This line of thought-forms part of what’s called “monetarism.”
These are just two examples of how economists tackle questions about what’s going on in the economy. But when you think about it, their jobs are incredibly important because they help inform organizations’ strategies so that they can do their part to keep the economy thriving!
Conclusion by Peter DeCaprio:
The study of economics isn’t just about money and numbers. By considering the big picture, economists can help people understand whose lives are being affected, how they’re being affected, and what strategies they could use to overcome such challenges that affect them as individuals or society.
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