Your kid ever ask you that? Probably not - if it isn't a video game they don't want to know anything about it. Even if they did up till now you'd probably only give them the official Government crapola:
(from Wikipedia) A recession is traditionally defined in macroeconomics as a decline in a country's real Gross Domestic Product (GDP) for two or more successive quarters of a year (equivalently, two consecutive quarters of negative real economic growth).
Multiple guess - this definition is used by the Government because it is: a) widely accepted by all the bobbleheads on bubblevision; b) politically correct; or, c) absolute bullsnot designed to keep the masses under control.
The correct answer is - d) all the above.
There is another definition (also from Wikipedia) The National Bureau of Economic Research defines a recession more ambiguously as "a significant decline in economic activity spread across the economy, lasting more than a few months." The National Bureau of Economic Research is not a government agency - figure that.
Note the careful wording by the author - "ambiguous". Please tell me what is ambiguous about "a significant decline in economic activity..." In other words if it can be accurately measured it is, to that author, ambiguous - must be a CNBC writer.
Obviously I prefer the second definition because GDP which is the most politically manipulated load of datacrap ever perpetrated on mankind does not appear anywhere in it.
Given the real definition I will now show you a couple of charts - these charts have annotated on them all of the recessions dating back to the end of the Eisenhower administration. I am showing that "a significant decline in economic activity spread across the economy, lasting more than a few months" is measurable. For this I selected the SPX because it is a bit more stable than the Dow, I am using a monthly basis, and of course Marlyn's amazing Curve.
We first have the period from 11/58 through 12/82. I selected this period because it contains the beginnings of the "great society", the start and end of the Vietnam conflict, and the absolute worst period of inflation the country has ever known since the end of WW II. You will note carefully that this period also contained a massive recession that finally bottomed in 3/75 and despite the fact that growth was robust from then out, Jimmy Carter was still elected president. So apparently at that time it wasn't "the economy, stupid".
The second period covers from 1/83 to the present time. You will note that the greatest economic expansion in the history of the country occurred during the Clinton Administration and the worst recession occurred during the Bush administration and neither president had anything at all to do with either event.
Kids, Presidents and political parties do not cause nor cure recessions - recessions are caused as a result of a slowing down of the economy and they are cured by the economy heating up again. It is known as the business cycle. It is as old as time and there ain't no repealing it or legislating it away. And despite the blah blah blah of useless politicians who exceed their Constitutional reach each and every time they attempt to do something about it - it can't be changed. Nor can the Federal Reserve even using all of their Harry Potter like magic spells will it out of existence - why - because it has to do with consumption.
In the past 46 years there have been 14 recessions of varying depth and severity. We are obviously either entering into a recession or exiting from a recession. You see there is no one place in time when there is a recession - the economy is either receding or expanding - there is no stasis. Stasis in an economy is death and you don't want that.
You could say they occur about every 4 years on average but that would be too simple. They occur when they occur and they are a direct reflection of the strength of the previous recovery. We just came out of one last year which was a reflection of the weakness of the recovery from the great depression of 6/98 to 3/03. And you didn't even know that a recession took place - did you?
Well it did - these charts don't lie. They reflect the strength of the returns of the stock market. And what do we know about returns? Returns go up when the stock market goes up and the stock market goes up when businesses report - what? - That's right - great earnings. And when businesses report crappy earnings the market goes down - i.e. returns diminish.
And earnings are directly related to what? That's right - income. And income is related to spending and when people really feel crappy they spend.
What - you didn't know that? You didn't know that people spend more money when they feel bad than when they feel good. Of course you did - you do it yourself - we all do - buying things makes us feel better. Why do you think automobile sales pick up at the bottom of these cycles?
And when do people feel worst of all? At the bottom of a recessionary trough. And what happens at the bottom of a recessionary trough? Companies reduce prices to entice people to spend money. And then they spend and then the economy grows again and then the earnings go up and then returns increase and companies report good earnings and then and then .... it happens all over again.
Now if you don't believe me about this business cycle stuff here are the two periods end to end - the period with the absolutely worst inflation known to America and today where we talk about inflation as if it were important - if you can't see any difference - well, guess what - neither can I.
I know - it's a little hard to comprehend and certainly contrary to everything you ever learned in ECON 101 but if you think about it you will have to agree with me - neither the Government nor the Fed has anything to do with any of this - it is people spending money that makes all the difference. And they bought us out of a really mean recession back in the 70's when interest rates were going up by deciles and not quarter points because people could care less about interest rates. People also do not care about inflation. People only care about themselves and about feeling better.
It is that simple. Of course - you'll never see it in a text book because if it were ever proven a half a million economists would be looking for work and they really aren't qualified to do anything - I mean look how they defined recessions - in a way that requires them to identify one.