What is a recession? | CNBC Explains

Summary

The video explores the causes, effects, and signs of recessions, with a focus on the global financial crisis of the late 2000s. It explains how recessions are defined, their economic impact, and the factors that trigger them, such as high interest rates, inflation, and lack of consumer confidence. The video highlights the interconnectedness of the global economy and how events in one region can spread, citing examples like the 1997 Asian financial crisis and the U.S.-China trade war. It also discusses concerns about deglobalization and suggests shifting focus towards economic satisfaction rather than growth.

Takeaways

• 😀 The last global recession occurred in the late 2000s and was the worst financial crisis since the Great Depression.
• 😀 A technical recession is defined as two consecutive quarters of negative GDP growth.
• 😀 The U.S. National Bureau of Economic Research tracks recessions by examining GDP, real income, employment, manufacturing, and retail.
• 😀 A recession is different from stagnation (low or zero growth) and depression (a severe and long-lasting decline).
• 😀 Between 1960 and 2007, 122 recessions were recorded in 21 advanced economies, but these economies were only in recession for around 10% of the time.
• 😀 Recessions usually last about a year, with a typical GDP decline of around 2%, although severe cases can see a 5% drop.
• 😀 During recessions, investments, imports, industrial production, and financial markets tend to suffer, leading to job losses and business bankruptcies.
• 😀 Economic signs of an impending recession include fewer manufacturing orders, a decline in consumer confidence, and changes in government bond markets.
• 😀 Factors that cause recessions include high interest rates, low consumer confidence, inflation, and reduced spending by businesses and consumers.
• 😀 A global recession can result from economic downturns in one country, as demonstrated by the 1997 East Asian financial crisis and the ongoing trade war between the U.S. and China.

Q & A

What is a technical recession?

A technical recession is defined as a decline in Gross Domestic Product (GDP) for two consecutive quarters, meaning the value of all goods and services produced in a country falls for six months straight.

How does the U.S. National Bureau of Economic Research track recessions?

The U.S. National Bureau of Economic Research tracks recessions by collecting monthly data on GDP, real income, employment, manufacturing, and retail. A decline in these economic indicators often signals a recession.

What is the difference between a recession and stagnation?

A recession is a significant economic downturn marked by a drop in GDP and other economic indicators, while stagnation refers to a period of low or zero economic growth without a significant decline.

What is the impact of a recession on employment?

During a recession, many people lose their jobs due to reduced demand for goods and services, which can lead to layoffs and an increase in unemployment rates.

What are common economic indicators that signal a recession?

Key indicators include a decline in manufacturing orders, a drop in consumer confidence, and shifts in the government bond market. Investors may also move from stocks to bonds during uncertain times.

What causes a recession in an economy?

Recessions often occur when spending decreases due to high interest rates, low consumer confidence, or inflation. This reduced spending causes a slowdown in economic growth and can lead to a recession.

How does inflation contribute to a recession?

Inflation raises the prices of goods and services. If wages don't increase accordingly, consumers have to cut back on spending, which can lead to reduced economic activity and may contribute to a recession.

How can a financial crisis in one country affect the global economy?

A financial crisis can spread beyond national borders due to interconnected economies. For instance, the 1997 Asian financial crisis impacted multiple countries, while the U.S.-China trade war has potential global consequences.

What role do government bonds play in signaling a recession?

When investors are concerned about the economy, they may sell stocks and buy government bonds, which are perceived as safer investments. A shift in bond markets can signal a looming recession.

What are some signs that a recession might be approaching?

Signs of an impending recession include a slowdown in manufacturing, a drop in consumer confidence, a weak stock market, and an increase in government bond purchases as investors seek safety.