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Periods That Might Be Classified as Global Recessions but Cannot Be Reasonably Called Recessions

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There is a real possibility that the U.S. economy could slip into recession sometime in the next 18 months; this risk is due largely to excessive interest rate increases in recent years and a likely fading of fiscal stimulus. The Trump administration has proven neither nimble nor smart when it comes to macroeconomic management. In particular, its attempt to dismantle many of the constraints put on financial sector speculation following the Great Recession is clearly a threat to future macroeconomic stability.

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It’s important to note macroeconomic indicators have to wane for a significant period of time to classify as a recession. In the United States, it’s generally accepted that GDP must drop for two consecutive quarters for a true recession to take place. However, the IMF does not specify a minimum length of time when examining global recessions. While there’s no official definition of a global recession, the criteria established by the IMF carries significant weight because of the organization’s stature across the globe. In contrast to some definitions of a recession, the IMF looks at additional factors beyond a decline in gross domestic product (GDP). There must also be a deterioration of other economic factors, ranging from oil consumption to employment rates. Ideally, economists would be able to simply add the GDP figures for each country to arrive at a “global GDP.” The vast number of currencies used throughout the world makes the process considerably more difficult. Though some organizations use exchange rates to calculate the aggregate output, the IMF prefers to use purchasing power parity (PPP)—that is, the number of goods or services that one unit of currency can buy—in its analysis. According to the IMF, there have been four global recessions since World War II, beginning in 1975, 1982, 1991 and 2009. This last recession was the deepest and widest of them all. Since 2010, the world economy has been in a process of recovery, albeit a slow one. The impact and severity of the effect of a global recession on a country varies based on several factors. For example, a country's trading relationships with the rest of the world determine the scale of impact on its manufacturing sector. On the other hand, the sophistication of its markets and investment efficiency determine how the financial services industry is affected. According to research, the United States would have suffered limited shocks to its economy, if the 2008 recession had not originated within its borders. This is mainly because it has limited trading relationships with the rest of the world. On the other hand, a manufacturing powerhouse like Germany would have suffered regardless of the robustness of its internal economy because it has vast number of trade linkages with the rest of the world.

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There are several ways recessions can slow business formation and expansion. First, to state the obvious, new businesses need new customers. An economic slowdown means that there is less spending overall; therefore, people looking to start a new business may decide to delay ventures until demand returns to normal levels. Second, new businesses need new investors and creditors. Lower incomes and wealth levels may mean that new business will find it more difficult to find individual investors, and credit constraints may limit borrowing from private banks. According to a recent report by the U.S. Small Business Administration (SBA 2009): “The credit freeze in the short-term funding market had a devastating effect on the economy and small firms. By late 2008, the normal production of goods and services had virtually stalled.” A survey of loan officers also suggests that standards for small-firm commercial and industrial loans were significantly tightened. Not only do recessions make it more difficult to start a new business, they also can undermine new start-ups that are struggling to get by. There may be many new businesses (and business mod els) that would be successful in ordinary times but are unable to succeed due to a lack of demand or credit. In 2008, 43,500 businesses filed for bankruptcy, up from 28,300 businesses in 2007 and more than double the 19,700 filings in 2006 (Romer, P. 1986). The recession’s impact can also be seen in initial public offering (IPO) activity. Firms use capital raised from IPOs to expand activities. In 2008, there were just 21 IPOs for operating companies, down from an annual average of 163 in the four years prior (Ritter 2009). Furthermore, the median age of IPOs in 2008 was slightly higher than in past years, meaning that it is the more-established firms that are receiving the capital influx.

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Generally speaking, the most recent was in the early 1990s in Finland, which registered a decline in GDP of about 14 percent. That depression coincided with the breakup of the Soviet Union, a large trading partner of Finland. During the Great Depression, the U.S. economy contracted by about 30 percent over a four-year period. Although the latest recession is obviously severe, its output cost was much smaller than that of the Great Depression.

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Murphy, Gregory C., and James A. Athanasou. 1999. The effect of unemployment on mental health. Journal of Occupational and Organizational Psychology. Vol. 72, pp. 83–99.

Nord, Mark, Margaret Andrews, and Steven Carlson. 2008. “Household Food Security in the United States, 2007.” Economic Research Report No. (ERR-66) USDA, November 2008, at http://www.ers.usda.gov/Publications/ERR66/.

Oreopoulos, P., Marianne Page, and Ann Huff Stevens. 2005. “The Intergenerational Effects of Worker Displacement.” National Bureau of Economic Research, Working Paper No. 11587: Cambridge, Mass.:NBER.

Ritter, Jay R. 2009. “Some Factoids about the 2008 IPO Market.” University of Florida, at http://bear.cba.ufl.edu/ritter/IPOs2008Factoids.pdf.

Romer, P. 1986. Increasing returns and long-run growth. Journal of Political Economy. Vol. 94, No. 5, pp. 1002-37.

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