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RECESSION

A recession is defined as a period of declining GDP, which lasts at least six months or two quarters. Recessions may vary in degree of severity and in duration. Extended recessions may last up to 18 months and may be accompanied by steep downturns in economic output. In the most severe recessions falling prices erode businesses' pricing power, margins, and profits as deflation takes hold. Recessions are generally triggered by an overall decrease in spending by businesses and consumers. As businesses and consumers pull back spending, overall demand falls. Businesses and consumers will often reduce spending as a cautionary measure in response to an economic event or shock, such as a financial crises, or the busting of a bubble in an inflated asset class, such as real estate or the stock market.

DEPRESSION

A depression is characterized by a decline in GDP, which lasts at least 18 months or six consecutive quarters. GDP often falls by 10% or more during a depression. A depression is the most severe type of recession and is accompanied by extremely high levels of unemployment and frozen credit markets. The steep fall in demand is more likely to lead to deflation during a depression.

ECONOMIC INDICATORS

There are various economic activities that one can look at to try to identify where the economy is in the business cycle. An individual can also use these economic indicators as a way to try and predict the direction of the economy in the future. The three types of economic indicators are:

1. Leading indicators

2. Coincident indicators

3. Lagging indicators

LEADING INDICATORS

Leading indicators are business conditions that change prior to a change in the overall economy. These indicators can be used as a gauge for the future direction of the economy. Leading indicators include:

• Building permits

• Stock market prices

• Money supply (M2)

• New orders for consumer goods

• Average weekly initial claims in unemployment

• Changes in raw material prices

• Changes in consumer or business borrowing

• Average work week for manufacturing

• Changes in inventories of durable goods

COINCIDENT INDICATORS

Changes in the economy cause an immediate change in the activity level of coincident indicators. As the business cycle changes, the level of activity in coincident indicators can confirm where the economy is. Coincident indicators include:

. GDP

• Industrial production

• Personal income

• Employment

• Average number of hours worked

• Manufacturing and trade sales

• Nonagricultural employment

LAGGING INDICATORS

Lagging indicators will only change after the state of the economy has changed direction. Lagging indicators can be used to confirm the new direction of the economy. Lagging indicators include:

• Average duration of unemployment

• Corporate profits

• Labor costs

• Consumer debt levels

• Commercial and industrial loans

• Business loans

 
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