Redefining Economic Downturns [Archive.org URL]

There seems to be a repeating pattern in which businesses and investors are invariably caught, without warning, in economic downturns and the accompanying bear markets. In cycle after cycle, the abilities of the business and investment communities to perceive the downturn as it occurs are typically so belated that there is little capacity for avoiding its damaging effects.

Much of the problem seems to revolve around businesses’ and investors’ focus on recession — typically defined as two successive quarters of absolute decline in total economic output (real GDP) on a quarter-versus-prior-quarter basis — as the key economic event to be feared, the big bad wolf of the economy, so to speak. Businesses and investors seem to feel that, if there is no recession, then everything is basically OK. But, repeatedly, business conditions, corporate profits, and the stock market appear to suffer badly before recessions ever come into view.

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