In this article, you will learn what is a technical recession. A recession can be defined as a sustained period of weak or negative growth in real GDP that is accompanied by a significant rise in the unemployment rate. Many other indicators of economic activity are also weak during a recession.
What is a Technical Recession?
The most common definition of recession used in the media is a 'technical recession' in which there have been two consecutive quarters of negative growth in real GDP. This definition often appears in textbooks and is widely used by journalists.
A technical recession is when a country faces a back-to-back decline (for two consecutive quarters) in the GDP. It is mainly used to snapshot the trends in GDP. It is of short duration. It is often caused by a single off event.
What are the Shortcomings of Technical Recession?
There are, however, a number of shortcomings of this definition of recession:
- GDP growth can be weak – but not negative – and still be associated with significant increases in the unemployment rate and hardship for households.
- Some components of GDP are volatile. Consequently, two consecutive quarters of negative growth in GDP can give a false signal about the underlying pace of economic growth.
- Measurement of the components of GDP is subject to revision as more data become available. Consequently, a negative quarterly growth figure can be revised away or a positive one can become negative, also increasing the possibility of a false signal about the underlying pace of economic growth.
Technical Recession of US
Today's GDP report showed that the US economy has had two consecutive quarters of negative GDP growth, which means a 'technical recession' in the first half of this year.
After -1.6% growth in the first quarter, the advance estimate for the second quarter is -0.9%. While the contraction of GDP in Q1 was largely caused by net exports (more than 3 ppt contributed), inventories contributed more than 2 ppt to the GDP decline in Q2.
However, while personal consumption and business investment grew at a decent pace in Q1. personal consumption slowed down considerably in Q2. business investment came to a standstill, and residential investment saw a steep decline. Q2. This suggests that underlying momentum in the economy is fading and it is only a matter of time before businesses slow down hiring.
At the moment, they are still hiring at a high pace to keep up with excess demand for goods and services, but if this comes down, we are going to see a slowdown in employment growth as well. Eventually, when employment growth turns negative and The unemployment rate rises, the NBER will declare an official recession.
Bottom Line
Some commentators also consider alternative measures of economic output to assess periods where economic growth is easing or below trend. This is about what is a technical recession.
