Event Types



A recession occurs when there are two quarters (or more) in a row of negative growth in the economy

  • Recessions traditionally form by a combination of cyclical vulnerabilities + an exogenous shock that starts the Recession
  • Recessions usually involve a negative feedback Loop:
    • Drop in Sales = Drop in Production = Drop in Income = Drop in Employment = Further Drop in Sales : Repeat

3D Method of Assessing Recession Impact

  1. Depth
  2. Diffusion 
  3. Duration

Typical signs of a recession

  • consumption slows - people stop buying things
  • unemployment goes up

Recession Impact on Budget Deficits

  • Recessions typically reduce tax collections and increase burden on government safety nets
  • Governments tend to ramp up spending during recessions to help counteract them
  • This typically results in growing budget deficits
  • In the US budget deficits typically increase by 4% of GDP during a recession (per year compared to the previous year not in a recession)
  • Loan and Bond Default Rates tend to jump during recessions (especially with junk Bonds and other lower-rated credit)

Theories on What Causes Recessions

  • Financial Innovation Goes to Far:  Wallstreet purses a new financial tactic and takes it too far.  Much money is made, then there is  crash
    • 2008 Great Recession:  Caused by over abuse of collateralized mortgage obligations
    • 2001 Recession:  Too many non-profitable .com IPOs
    • 1990 Recession:  Excessive junk bond lending