Recessions: Part I

By Gregg Schoenberg Tuesday, December 6, 2011

If you’ve been paying attention to the (mostly grim) financial news lately then you may have noticed a good deal of chatter about whether or not we are headed for a double-dip recession. And while most of you are probably familiar with the dreaded double-dip when it comes to chips and dip, you may be wondering what exactly constitutes a double-dip with regard to recessions, or, for that matter, who determines whether we are experiencing a recession and how exactly one is defined.  So let’s try and answer these questions before moving on to offer some advice on how to cope with a recession, double-dip or otherwise.

In the U.S. the National Bureau of Economic Research (NBER) has a Business Cycle Dating Committee that is tasked with maintaining a chronology of the country’s business cycle and is the body that officially calculates when recessions begin and end.  Unfortunately its definition of a recession as “a period between a peak and a trough” in economic activity is somewhat less than instructive.

Perhaps because of the NBER’s nebulous definition, the financial press—as well as most professionals in the field—has come to rely on the more tangible idea that two consecutive quarters of decline in real Gross Domestic Product (GDP) constitutes a recession. (For those of you who decided to give Econ 101 a pass, GDP is the total value of all goods and services produced in a country in a given year.)  We’ll rely on this commonly accepted and easily quantifiable definition for our purposes here.

And while the NBER does not define a special category of double-dip recession, practically speaking this refers to a recession that begins shortly after the previous one has ended.  In the current case people are concerned that there may be another recession looming, despite the fact that the one that resulted from the global financial crisis just ended in June of 2009, according to the NBER.

So we now know that during a recession the total amount of goods and services being produced is declining.  And that we may be headed for another such period even though we only recently emerged from the particularly nasty recession of 2007 through 2009.

So what does this mean for small-business owners?  Because the amount of goods that gets produced goes into decline when we experience a recession, recessions are often characterized by periods of high and rising unemployment, as employers are forced to lay off workers when demand for their products sags.  As more folks enter the ranks of the unemployed, the demand for goods and services can fall further, as it is tough for the out-of-work to justify buying anything other than the essentials.  In this way recessions and unemployment can have a negative self-reinforcing effect that makes things tough not just for the unemployed but for those trying to keep their businesses afloat during these turbulent times.  Fortunately there are some strategies that can help you cope, and we’ll explore a few of these in our next post.

 

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