Timely and Relevant News: What Classifies as a Recession?
Markets woke up on Thursday morning, just in time to get put in time out. The 15-minute break, known as a circuit breaker occurred after the markets dropped 7 percent right off the bat. Recent developments included a limited ban on travel from certain European countries and continued cancellations or postponements of large gatherings.
An Economic Stop
Chief economic adviser at Allianz, Mohamed El-Erian stated that, "General policy responses... are not going to reactivate the economy. What we need is more resources for the medical side. This will give people confidence that the virus will get contained." Until that time, "The journey to the bottom is very unsettling."
El-Erian refers to the current situation as an, "economic stop." People are cancelling their travel plans. Large groups are postponing their events. Employees are working from home. Various schools are encountering temporary closings.
Are We Experiencing a Recession?
A recession occurs when the gross domestic product (GDP) of a country experiences negative growth for two consecutive quarters (6 months). The important take away here is that a recession is characterized by the duration of the dip, not the amount of the decline. Recessions are also often characterized by a significant rise in unemployment.
Researchers at LPL are trying to anticipate what a fiscal policy might entail. They stated, "We think we will get something big, even if a payroll tax cut doesn’t get through Congress. A package will likely include cheap loans to small businesses and affected industries (travel, retail, energy, etc.), paid sick leave, enhanced unemployment insurance, tax deferrals, and affordable (or free) medical treatment."
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