The business cycle is the alternation of expansions and contractions in economic activity. Expansions are the norm; recessions are the exception. Both are dated retrospectively by the NBER Business Cycle Dating Committee in the United States. Understanding what triggers each is the beginning of tactical macro thinking.
- 01State the NBER's definition of a recession.
- 02List the classical triggers of a recession.
- 03Explain why every recession's cause is unique in its details.
The definition
The NBER defines a recession as 'a significant decline in economic activity that is spread across the economy and lasts more than a few months.' The popular shorthand — two consecutive quarters of negative GDP growth — is a heuristic, not the definition, and it can miss recessions the NBER later dates.
The classical triggers
Monetary tightening: the Fed raises rates faster than the economy can adjust. Financial crisis: a solvency event in the banking system freezes credit. Oil shock: a sharp price rise in an essential input. Balance-sheet retrenchment: households or firms deleveraging in response to shock. Most recessions combine two or three.
Why every one is different
The 2001 recession was a capital-spending bust. The 2008 recession was a financial crisis. The 2020 recession was a public-health lockdown. The commonality is the aggregate effect; the mechanisms differ. Pattern-matching across recessions is useful only up to a point.
- NBER dates recessions retrospectively.
- Classical triggers: tightening, crisis, oil, deleveraging.
- Every recession is unique in its mechanism.