Wednesday, May 2, 2007

What is a Recession, Anyway?
Yesterday morning while watching CNBC I listened to two individuals debate whether or not the US would have recession. One commentator thought there would be a recession and the other thought there would be a “soft landing” for the US economy. What exactly is a recession, a soft landing, and a hard landing?

It seems that although everyone talks about recessions there is no official agreed-upon definition. According to the National Bureau of Economic Research (NBER) :

The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP.

The NBER is the organization that officially defines a recession in the US. Although it does not use an exact definition a recession is generally defined as:

. . . . a recession-the way we (NBER) use the word-is a period of diminishing (economic) activity . . . .. We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough. The time in between is a recession, a period when the economy is contracting.

. . . Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. . .

In addition:

The NBER considers real GDP to be the single measure that comes closest to capturing what it means by "aggregate economic activity." The committee therefore places considerable weight on real GDP and other output measures. Following the precedents established in many decades of maintaining its business cycle chronology, however, the committee considers a wide range of indicators of economic activity. There is no fixed rule for how the different indicators are weighted.

ADVFN website defines a soft landing as:

A term describing a growth rate high enough to keep the economy out of recession, but also slow enough to prevent high inflation and interest rates.

By the way, a hard landing is a recession.

More on recessions, soft landings, etc. in later posts.

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