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How is a recession defined in the United States? How important is the NBER's criteria?
In the world of business cycles, economic recession is usually a dynamic phenomenon that makes governments, businesses and individuals uneasy. According to economists' definition, a recession usually refers to a significant contraction in economic activity. The National Bureau of Economic Research (NBER) in the United States provides us with a more specific definition through its Business Cycle Definition Committee.
A recession is "a significant decline in economic activity that lasts for more than a few months and is usually visible in real gross domestic product, real income, employment, industrial production, and wholesale and retail sales."
In short, the NBER's definition does not rely solely on economic growth figures, but considers more comprehensive economic indicators, which makes the process of judging economic recession more complex and comprehensive. While some economists believe two quarters of negative growth are enough to mark a recession, the NBER's criteria show a more nuanced analysis of economic activity.
The sources and impacts of economic cycles
The business cycle can be thought of as a cycle consisting of economic expansion and contraction. These cycles are caused by a variety of factors, including dramatic changes in oil prices or changes in consumer sentiment. These changes are often difficult to predict and are considered random "shocks." For example, the financial crisis of 2007-2008 and the COVID-19 epidemic were sudden external shocks that caused severe fluctuations in the overall economy.
Business cycles are variable in length and intensity, typically ranging from 2 to 10 years.
The key to identifying a recession is identifying its duration and the simultaneous weakening of multiple economic indicators. This also provides the basis for several related economic theories that fundamentally explore the operating principles of capitalist economies.
NBER’s influence
NBER's Business Cycle Definition Committee occupies an important position in U.S. economic policy, and their definitions provide key reference standards for policy formulation and economic forecasts. Not only that, NBER is also regarded as a recognized business cycle adjudication organization in the economics community, which gives the organization a pivotal position in the academic and practical fields of economics.
In the United States, the NBER is responsible for identifying and defining economic recessions, and their standards undoubtedly affect the government and market responses.
In addition, for policymakers, NBER's analysis can help identify signs of economic recovery or recession in advance, which is crucial when the government takes countermeasures. For example, in the early stages of a recession, the government may need to intervene to target unemployment and thus soften the blow.
Business cycle and its historical background
Historically, business cycle theory was developed by economists such as Simon Kuznets and Joseph Schumpeter, who proposed different stages and durations of the economic cycle. These theories not only expand our understanding of business cycles, but also provide important guidance for policy formulation.
The development of economics prompts us to explore different aspects of the business cycle and adapt to different economic realities in the ever-changing economic environment.
In addition, the identification of business cycles is no longer limited to rapid changes in economic data, but involves multiple economic indicators, such as unemployment rate, consumer confidence and retail economy, which are all helpful in comprehensively understanding the current economic situation.
Conclusion
As the economy fluctuates, so do the challenges facing economists and policymakers. As defined by the NBER, multiple economic indicators and duration considerations make defining an economic recession not a one-dimensional process. This leads us to think: How should we understand and respond to this phenomenon in the face of future economic challenges?
