FIN FPX 5710 Assessment 1 Recession Analysis FIN-FPX5710 Economic Foundations for Financial Decision Making
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Introduction
The fear of recession is universal, affecting every country around the world. The global recession of 2008, for instance, had widespread consequences, impacting nearly all major industries. Recession is generally described as a significant slowdown or halt in economic activities, leading to a decline in the economy (Bennet, Coleman & Co., 2018). Recessions have occurred throughout history; since the 19th century, the world has experienced 47 recessions. Although accurately predicting when a recession will occur is difficult, there are various economic indicators that signal the possibility of an impending recession.
Recession Indicators:
| Indicator | Description |
|---|---|
| Gross Domestic Product (GDP) | GDP is a primary indicator of economic performance. It is calculated by summing total consumption, investment, government spending, and net exports (Kramer, 2018). A strong economy typically sees high GDP, while a struggling economy experiences low GDP. |
| Unemployment Rate | Another key recession indicator is the unemployment rate. A healthy economy tends to have low unemployment, which correlates with higher consumer spending in the retail sector. Low unemployment boosts market confidence, whereas high unemployment signals economic downturn (Mishkin, 2019). |
| Stock Market | The stock market also reflects recession signals. As thousands of analysts evaluate the growth potential of industries daily, a rising stock market generally indicates positive economic prospects (Mishkin, 2019). |
Fiscal and Monetary Policy Changes
In response to recession-induced economic downturns, the United States employs a combination of discretionary fiscal and monetary policies. Through monetary policy, the central bank can exert control over the banking system to mitigate the impact of a recession. In the United States, prices are determined by supply and demand. When a recession threatens the economy, the central bank implements an expansionary monetary policy, which increases the money supply, raises interest rates, and reduces loan availability (McConnell, 2018). This approach helps stabilize prices, address unemployment, and restore economic growth.
Changes in fiscal policy represent another macroeconomic strategy used by the government to combat recession effects. This tool allows the government to directly influence the economy through spending and taxation policies. By increasing government spending or reducing taxes, demand is stimulated. For example, tax cuts leave individuals with more money to spend, thus driving consumer demand. Additionally, the government can purchase goods and services to increase overall spending. Reductions in income and payroll taxes also increase individuals’ purchasing power (McConnell, 2018).
Keynesian vs. Austrian Economics
While no theory can entirely eliminate or reverse a recession, two economic schools of thought—Keynesian and Austrian economics—offer contrasting solutions.
Keynesian economics, developed by John Maynard Keynes, argues that government intervention is essential during economic crises. According to Keynes, government spending can support economic activity when the private sector cannot. His theory emphasizes aggregate demand, defined as the total of consumption, investment, government spending, and net exports. Keynesian theory posits that when income decreases, demand also falls, as one person’s spending is another’s income. A decline in spending leads to decreased sales and increased unemployment (Blinder). Aggregate demand is always equal to aggregate supply, according to Keynesian theory.
Austrian economics, on the other hand, opposes government intervention, favoring private-sector solutions to recession. Austrian economists argue that government cannot gather sufficient information to address economic challenges and should not interfere by imposing policies that disrupt natural market forces (Neck, 2014). They contend that measures like interest rate adjustments result in poor investments. Instead, Austrian economics suggests observing individual behaviors and market responses to predict future outcomes (Vaughn, 2013).
Conclusion
Economic growth is never linear; it fluctuates over time and varies across economies. The periods of growth and decline differ, but economic indicators help analyze past recessions and anticipate future ones. Some of the key indicators discussed include GDP, unemployment rates, and stock market performance. In the United States, Keynesian principles largely guide fisca