As the rate of economy expansion ages, growth slows, and investment (among other economic activities) shrinks; arguably recession becomes inevitable. Recession refers to a period of sustained downturn in (declining) economic activities spread across a country’s economy (Slavin, 2002). Some of the major economic indicators of a recession include, but not limited to, the level of industrial production/manufacturing activity, stock markets, housing markets, and real personal income.
1.1. Stock markets
Although some economists argue that the stock markets do not serve as the most important economic indicator, it serves as the leading indicator that most people turn to first. Undeniably, companies’ earning/estimates of earning form the basis of stock prices. As such stock markets serve to indicate the economy’s direction should the estimates of earnings be correct. A down market reflects a decrease in production activities thus indicating that the economy heads to a recession if it is not already there. However, stock markets as indicators of a recession are not without inherent flaws owing to the inaccuracy of estimates of earning coupled with the vulnerability of the markets to manipulation. The susceptibility of stock markets to the creation of ‘bubbles’ hence false indication of the direction of the economy (Robert, 2012) cannot go unmentioned.
1.2. Housing markets
A declining home prices suggest that supply is more than demand. Consequently, the current prices happen to be unaffordable or inflated as a result of a housing bubble. As a consequence, the economy suffers owing to reduced property tax, declining interest rates, increase in unemployment (construction), and, more importantly, a reduction in homeowner wealth.
1.3. Personal income (excluding transfer payment)
Personal income refers to the total earnings of an individual for investment, wages, and other sources. Declining personal income serves as a primary indicator of recession because it reflects increasing unemployment rates, declining production (and in extension investments), and declining personal expenditure.
2. Lowering interest rate as a solution to recession
Arguably, given the Fed’s role as an intermediary bank and lending short-term loans to banks, Fed plays an indispensable role in controlling/overseeing money supply in the economy. As such Fed can stimulate economic growth by lowering the interest rates and discount rates. The fact would allow banks to issues loans at a low-interest rates. Consequently, consumption (and hence aggregate demand) and investment would increase to restore the economy to its economic health. Lowering interest rates in not however without some setbacks. Fazzari et al. (2012) view low-interest rates as an unadulterated blessing in an economy given that low-interest rates result in a decline in return on saving and a reduction in fixed-income investments.
Lowering interest rates, though laced with some setbacks, serves as a significant but an insufficient tool to correct recession.
References
Fazzari. S., Cynamon. B., and Mark.S. (2012). After the Recession: The struggle for Economic
Recovery. Cambridge University Press
Robert. H. (2012). The Great Recession: Market Failure or Policy Failure. Cambridge University Press
Slavin. S. (2002). Macroeconomics. McGraw-Hill/Irwin
