For a long time we`ve been hearing about “recession“ on the US`s market, it is in the newspapers, the television news channels and the financial reports. We are always trying to stay informed about what is coming next regarding the recession.
By definition, recession means the decline in Gross Domestic Product or GDP of two consecutive quarters of a country. As a definition, this would be ok, but if we want to know more, we need to understand what GDP means.
Gross Domestic Product is the total value of all final goods and services produced in an economy in a certain year, final goods that are not changed into other goods. Those get evaluated at their market value and this means that if the final value of the goods and services produced in a certain year go down for two consecutive trimesters the state will be decalred as beeing in recession. This cahnges are seen in industrial production, employment, real income, wholesales-retail sales and the real GDP in the economy.
If we search the data of NBER- National Bureau of Economic Research since 1945 have been ten recessions. From the middle 1940 until 2007, the media recession was arround 10 months, and the media for expansion was 57 months, with this we obtain a media businuess cycle of 67 months, that would be five years and 7 months. In the period we are talking about the smaller recession lasted just 6 months and it was from January to July 1980. There were also to long recessions, the longest, of 16 months each, the first one lasted from November 1973 to march 1975, and the second one from July 1981 to November 1982.
It was quite a going down for the real GDP in both these recessions. Now, regarding the expansions, the shortest one was from April 1958 to April 1960 and the longest from march1991 to march 2001, this one has also set a record of 120 consecutive months of growth. Luckily, America had only two mild recessions consecutively and more extended periods of expansion during the past 25 years or more.
There are many different factors that can throw an economy into a state of recession, but the main factor that contributes most is the inflation. By definition, inflation is the condition of an economy when the prices of services and goods rise hugely over acertain period of time. Now the problem is that the higher the rate of inflation is, the smaller the percentage of goods and services buyed with the same amount of money is…This means that when the prices reach the higher level people will tend to save more money and limit their purchasing at the strictly necessary and the result reflects in the GDP going down.
The cause of inflation may be the increased costs of production, the higher energy costs and the national debt. All this force the companies to reduce their costs as well as releasing some workers from their functions and this brings a higher rate to the unemployment population.
Here we have made a list of factors that send any economy into recession:
- Credit crunch – the shortage of our finances
- Smaller house prices – which is related to the credit crunch and the shortage of mortgages
- Cost – push inflation to make the incomes smaller ad reduce the disposable income
- The collapse of confidence for the finance sector – that will cause a lower confidence in the real economy
Usually the recession brings allong all the major consequences that create the mutilation of the economy. Her biggest efect is the inflation, this is one of the factors that cause the recession but also a secundary effect of the recession. This means the products reach the higher prices and usually the people cut down their expenses; so inflation becomes a major effect of recession. Another effect of the recession in the economy is the lower income, this makes people cut down the costs, buy less products and reduce this way the income in economy, influencing this way the profits or no profits.
The next consquence we shoul talk about is the increasment in the mortgage rates, because the lenders will try to cover a part of their losses by increasing the mortage rates. Another target when the economy is under recession is the emplyment opportunities. The companies will try to reduce the costs, release some of the employees or all sometimes, and give this way a higher rate of uneplyment in the economy.
As a conclusion: when economy gets under recession firms profitabilty is going down. Here you have the reasons:
- Tendency for price wars to evolve in a recession, small sales encourage firms to cut prices
- Going down sales will conduce to lower revenues.