Recessions are a cyclical phenomenon in the natural wave of the economy. It is commonly characterised by a decline in economic activity across the entire economy, usually lasting for more than a few months. While recessions are an inevitable part of the economic life cycle, their causes can vary, ranging from financial crises, interest rate hikes, oil price shocks, and other economic shocks.
The Business Cycle Dating Committee is a group of economists formed by the National Bureau of Economic Research (NBER) that plays a crucial role in determining when a recession started and ended. The committee analyses various data points, such as income, personal consumption expenditures, employment, GDP, and industrial production, to make its call on the state of the economy. A common rule of thumb is a decline in GDP for two consecutive quarters. The committee, however, tends to take more time to revise and analyse the data before making a firm determination.
One important leading indicator that investors and economists look at when predicting a recession is the inverse bond yield curve. The bond yield is calculated as the difference in yield, usually between a 10-year bond and a 3-month bond. A wide spread of negative returns between the yields of these two bonds is often seen as a sign of an impending recession, as during times of economic uncertainty, investors tend to shift their investments towards longer-term assets such as 10-year bonds, resulting in lower yields compared to short-term assets. Historically, the rebound in inverse yield to normal yield took some time, between 3 and 6 months, before a recessionary period was declared.
Knowing when a recession has started is critical for businesses and governments. For businesses, this information can help them make informed decisions related to job security, product development, and their response to the downturn. Governments, on the other hand, can use this information to make informed decisions on economic policy and provide the necessary support to individuals and businesses during a recession. It's necessary knowledge for making informed decisions to maintain the stability of the economy.
In conclusion, understanding recessions and their causes, symptoms, and starting points is crucial for businesses, governments, and individuals to effectively respond and maintain stability. The Business Cycle Dating Committee is in charge of providing useful information about the state of the economy and assisting all economic participants in making informed decisions. By keeping a close eye on the data and providing an accurate picture of the economy, the committee plays a critical role in navigating the ups and downs of the business cycle.