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Economic trends.

ECONOMIC TRENDS

Recession. After over 7 1/2 years of economic expansion - the longest peacetime expansion since World War II - the U.S. economy appears on the brink of a recession, if it has not already tipped into one. What exactly constitutes a recession? How severe are they typically? How long do they last? Is this one likely to be more or less severe than most?

To begin with, the definition of a recession is not clearcut. Newspaper stories frequently declare that a recession is defined as two consecutive quarterly declines in real gross national product (GNP). This is the popular definition, but it is not the one economists typically use. Recessions are periods of the business cycle during which economic activity declines. GNP is one important gauge considered in judging the extent of economic weakness, but it is not the only one. The official beginning of a recession and the end are designated by the National Bureau of Economic Research (NBER) - a private research organization in New York - based on an analysis of many statistical indicators, including GNP, unemployment, employment growth, industrial production and many others.

Chart 1 and Table 1 show selected characteristics of post-World War II recessions. There have been eight. NBER designates both the peak month (and quarter) immediately preceding each recession, where the business cycle is at its high point, and the trough month (and quarter) signifying the end of a recession, where the business cycle is at its low point. Immediately following the peak through the trough is the recession per se.

As Chart 1 illustrates, the unemployment rate soars during recessions. It then declines during the expansions following recessions, with particularly sharp drops in the first few quarters after the recession. The chart also shows that GNP declines or grows extremely slowly during recessions. However, a review of GNP growth during recessions reveals the pitfalls of defining a recession as two consecutive quarters of decline in GNP. Neither the 1960-1961 recession, nor the 1980 recession showed two successive quarterly declines; yet there is little doubt from other indicators that the economy turned downward during those recessionary periods.

Table 1 shows some details about the duration and severity of post-war recessions. The average length of post-war recessions was 11 months, with the two most recent showing how much the duration can vary. The 1980 recession lasted only six months, while the 1981-1982 recession lasted 16 months. [Tabular Data Omitted]

The severity also varied a great deal. The average increase in the unemployment rate from the business cycle peak to the trough was 3 percentage points, while the decline in GNP averaged a little more than 2 percent. In the past twenty years, there has been a clear relationship between the length of a recession and its severity. For instance, the 1973-1975 and the 1981-1982 recessions were significantly longer and deeper than the 1980 recession. The former two recessions lasted nearly a year and a half and saw the unemployment rate surge 3 1/2 to 4 percentage points. The 1980 recession lasted only half a year, with only a 1 1/2 percentage point increase in the unemployment rate.

The forecast 1990-1991 recession is expected to be extremely mild compared to the other post-war recessions. Our forecast calls for a peak in the third quarter of 1990 and a trough in the first quarter of 1991. The unemployment rate is only expected to rise a little more than 1 percentage point and real GNP is only expected to fall about 1 percent. In both duration and severity, it is much more likely to resemble the 1960-1961 recession than the much deeper recessions of the 1940s, 1950s, 1973-1975, and 1981-1982.
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Title Annotation:recession forecast
Author:Holloway, Thomas M.
Publication:Mortgage Banking
Article Type:column
Date:Nov 1, 1990
Words:615
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