Saturday, September 29, 2007

What is a Recession, Soft Landing, Hard Landing, and Stagflation?

With all the talk about recessions and a whole host of other terms like soft landing, hard landing, and stagflation, I thought it would be useful to define a few terms to make sure everyone is on the same page.

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. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.

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.

According to

Stagflation is a period of high inflation and high unemployment (stagnation) occurring simultaneously.

Soft Landing is the avoidance of both inflation and high interest rates as well as a recession as an economy slows its growth rate. opposite of hard landing.

Hard Landing is when the economy goes directly from a period of expansion to a recession. This might happen if a government or monetary authority is more restrictive in its fiscal or monetary policy than what is appropriate for the economy. opposite of soft landing.

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