What Exactly IS a Recession?
When Will the Tide Turn, and How Can You Protect Yourself?
by www.SixWise.com

Every time you turn on the TV news, open a newspaper or surf the Web, the "R" word pops up. But amidst all this talk of a recession, there are some major questions still lurking, namely, what exactly does it mean to be in a recession, and does the United States currently qualify?

This is not a 21st century quandary, not even close. Back in November 1953, some 55 years ago, TIME ran an article that claimed the number one worry of U.S. businessmen was a recession. But, the article went on, "The strange fact is that nobody seems to know exactly what a recession is. The word is as hard to define as love."

Defining a Recession

Back in the '50s Sumner Slichter, a Harvard economist, told TIME a recession is "no more than a momentary drop in employment and production."

In 2008, CNN reported that, "The popular view of when a recession occurs is when gross national product, the broad measure of the nation's economic activity, comes in less than zero for two consecutive quarters."

Officially, though, it is the National Bureau of Economic Research (NBER) that determines when a recession starts and stops. In doing so they analyze various markers of nationwide economic activity such as:

• The number of people on U.S. payrolls

• Industrial production

• Inflation-adjusted measures of personal income

• Sales of the manufacturing and wholesale-retail sectors

NBER defines a recession as "significant decline in economic activity lasting more than a few months."

"Our procedure differs from the two-quarter rule in a number of ways," NBER states. "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."

Is the United States in a Recession Right Now?

Because NBER will not define a recession until economic activity has been declining for several months, it can take six months or longer for a recession to be officially announced. For instance, NBER officially announced the 2001 U.S. recession that started in March that year in November, which was actually the month the recession ended.

Historically speaking, the last recession that occurred in 2001-2002 was the result of the collapse of the dot.com bubble, the September 11th attacks, and accounting scandals.

In 2008, Recession.org puts the cause of the current recession as:

• High oil prices, which led to high food prices and global inflation

• A substantial credit crisis leading to the bankruptcy of several large and well established investment banks

• Increased unemployment

Still, that doesn't answer the question, is the United States in a recession or not?

Most experts agree the answer is "yes."

CNN polled over 1,000 Americans back in March, and 74 percent said they think the economy is in a recession. And Jim Rogers, a highly regarded investor, told Britain's Daily Telegraph that the "U.S. economy is undoubtedly in a recession." That was in October 2007.

Meanwhile, San Francisco Federal Reserve Bank President Janet Yellen also admitted the "R" word in October 2008.

"Indeed, the U.S. economy appears to be in a recession," she said, adding, "This is not a controversial view."

Also in October 2008, Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., added her two-cents. "The U.S. economy is in a recession that began in late 2007 and is likely to last much longer than the typical downturn," she said.

As Sonders suggested, the question now is not "Is the U.S. in a recession?" but "How long is it going to last?"

So what can you do?

• Work to assure you have savings in excess of 3 to 6 months or more of what you will need to pay your bills if you become unemployed.

• Set up an automatic withdrawal from your monthly paycheck with your bank and employer so your savings automatically increases.

• Invest in the stock market when the market is down as historically those who invest in the recession periods when the market is down gain the highest increased shares of stock value.

• For your children or grandchildren set up a college fund account. Many have little to no taxation on gains during the period of the term of the savings up to college age of the child.

• Teach your children well by educating them on how to manage their money for life!

Recommended Reading

The Six Most Recession-Proof Businesses

How to Make a Weak Economy Work Best for You

Sources

CNNMoney.com October 15, 2008

Time November 9, 1953

CNN.com March 17, 2008

Reuters.com October 24, 2007

Yahoo Finance October 22, 2008

Recession.org