Managers need to know:
There’s a long lag time between cause and effect in monetary policy
The signals of an impending recession and downturn
Monetary Policy is the most common cause of recession
The federal Reserve influences both the money supply and the short-term interest rates
The direction and magnitude of Fed policy
In severe recession watch the money supply more than the interest rates
The possibility of changes in regulations that suddenly limit lenders’ ability to meet credit needs of their usual consumers
| Causes of Recessions | How it works | Associated Recessions |
|---|---|---|
| monetary policy | The Fed can slow the economy by tightening monetary policy, which decreases the money supply and/or raises interest rates. Higher interests reduce economic activity by increasing financing costs. | all recessions? The most famous may be the 1980 recession following the Fed under the then chairman Paul Volcker dramatically raised interest rates to fight inflation |
| supply shocks | A sudden increase in an essential commodity can tip the economy into recession. A good example is the oil crisis of the 1970s. | the 1973-75 recession following an oil embargo |
| credit crunches | Banks play a critical role in the economy by funding business operations and production and individuals for their purchases of big-ticket items like houses or cars. When loans become unavailable (credit crunches), the economy can fall into recession. | the Great Recession of 2007-2008 following the burst of the U.S. housing market bubble |
| waves of optimism and pessimism | Listen to the everyday business managers to gauge the level of uncertainty in the economy. When they start sounding gloomy, a recession may be around the corner. | the 2001 recession following the September 11 attack |
| consumer confidence | In some economies, consumer spending plays a critical role. The United States is a good example. A sudden and wide swing in consumer confidence can influence the economy. | the 1990-1991 recession in the buildup of troops prior to the first Persian Gulf War |
| fiscal policy | Increased government spending, such as new highways and aircraft carriers, can stimulate the economy. The government can also use taxes to influence the economy. For example, a tax reduction would leave more money for consumers to spend and vice versa. | the 1970 recession following the end of Vietnam War, |
| foreign business cycles | A recession in an essential trading country can influence the domestic economy. For example, a Canadian recession can negatively affect the economy in the northern border regions of the United States that heavily rely on trade with Canada. | |
| trade wars | Restrictions on foreign trade reduce our exports to the foreign country and thus can be recessionary. The Great Depression is a good example. | the Great Depression following the Smoot-Hawley tariff |
| speculative mania | An asset price bubble and the following crash can contribute to a recession. When asset prices crash, consumers feel less wealthy and decrease spending. | Japan’s depression in the 1990s following a real estate boom, the 2001 recession following the American high-tech stock market bubble, the great tulip craze of Holland in 1636-1637 |
Monetary Policy affects the money supply in circulation and also the short-term interest rates. When the Fed’s Tighten the policy usually the economy slows down.
You need to watch short and long term interest rate percentages, “real” interest rates which are adjusted to inflation, as well as the supply of money. If Short-term interest rates are higher than long-term it causes the economy to slow down
A supply shock is a sudden reduction in availability of a resource. This effects the economy greatly impacting our resources and supplies to consumers. Without adequate resources no one is there to buy the product slowing GDP spending.
When a supply shock occurs it is sudden and unexpected often coming without warning. Although the way Fed’s responds to it determines the outcome. They can either tight monetary policy and further aggravate the recession, or they can leave us some inflation and recession called “stagflation”.
Credit crunches are when the bank and thrift industries cannot loan money even with high interest rates. This causes the banks to stop lending out money and in turn had to deem the loans noncollectable. Causing banks to loose money.
In order to gauge a credit crunch you should watch the regulations that suddenly limit a lenders’ ability to meet the credit needs of their usual customers.
Optimism can lead to new projects and more spending while pessimism can lead to a large reduction in capital spending.
You should listen to everyday managers not Presidents, CEO’s, or Farmers. One should also watch business cycles.
When people have jobs and and inflation is low they tend to spend more money raising the GDP spending.
There is nothing to keep people from shopping and buying despite with political leaders might ask or say. Survey’s of consumer additives can be a good gauge for what consumers are looking to buy in the future like appliances, cars, and other durable items.
Fiscal policy and government overspending can cause increases in taxes lessening taxpayers disposable income and a drop in Private money lending.
In order to gauge fiscal policy you must observe government spending as well as military-driven changes like wars.
Because the United States has increasing trade flows with other countries it is reasonable to assume that foreign recessions will also effect the United States.
Imports and exports to and from foreign countries can help us determine a foreign business cycle. Often times it is hard to predict when a foreign economic downturn will occur.
Restrictions on foreign trade can impact the United States imports and exports. Often times in a country tightens or increases it’s tariffs other countries will do the same in retaliation hiking up the prices of essential goods.
Usually these are made by a country and cannot be predicted. Sometimes wars or foreign conflict can impose tariffs on “enemies” and cause a further downturn in their economy.
Can lead to a boom in spending followed by a crash. Prices of assets will be limited by the cost of creating new products. Prices will continue to go down, then the price decline will accelerate and prices will fall sharply. Consumer spending will drop dramatically and so will GDP.
You should watch monetary expansion as an indicator meaning the Federal Reserve or other central bank made too much money available to the economy.
Explain each of the following terms in your own words. The author explains the terms in the textbook. If necessary, you may also Google the term on the Web. Good resources include:
Explain the terms in your own words briefly.
Describe the characteristics of the following events briefly.