Suppose you are an advisor to the Business Cycle Dating Committee. You are asked to look at macroeconomic data to evaluate whether the economy has entered a recession this year. Which data do you look at? How does the economy behave at the onset of a

Question

recession?

What will be an ideal response?

Answer 1

Since a recession is defined as significant decline in economic activity, I would look at data that would indicate this decline. The data that illustrates economic activity is GDP, real income, and employment. I might also look for declines in spending on the part of households and firms, paying attention to durable goods sales, capital goods sales, and wholesale and retail sales.
A recession usually begins with a decline in spending on the part of households and/or firms. Firms start to buy less capital goods, equipment, machinery, tools, and buildings. Purchases of durable goods by households, such as appliances and cars, also begin to decline. Purchases of houses begin to slow. This slowdown in spending causes firms that produce capital goods, consumer durables, and houses to cut back on producing these items. They begin to lay off workers. Income declines as profits fall and workers who are laid off are no longer being paid. This drop in income leads to further declines in spending, and other firms start to cut back on production and lay workers off. The economy moves into recession.