Everyone knows that the United States is currently in the throes of a severe recession. In the discussion which follows, we look at the characteristics of recessions within the context of the business cycle and its crucial impact on national economies.

Everyone in Bermuda is familiar with the word 'economy' and most Bermudians would be able to provide a workable definition of what the term means.

A cursory review of the Wikipedia, the free encyclopedia easily located on the Internet, reveals the following: the economy is the realised social system of production, exchange, distribution and consumption of goods and services of a country or other locality during a specific period of time.

We will use this definition since it is essentially the same as the definition used when we studied economics at Queens University and the University of Ottawa — both located in Canada. In what follows, the discussion refers again and again to the impact of the business cycle on the performance of the economy.

What is the business cycle? Using the Wikipedia once more, we learn that a business cycle is "A sequence of economic activity in a nation's economy that is typically characterised by four phases-recession, recovery, growth, and decline-that repeat themselves over time".

We shall now prepare simple definitions of the main characteristics of the Business Cycle.

"The RECESSION is a period of reduced economic activity in which levels of buying, selling, production, and employment typically diminish". That is the period that the Bermuda economy is believed to have entered.

The RECOVERY, "also known as an upturn, is the point at which the economy 'troughs' out and starts working its way up to a better financial footing".

"The GROWTH period, refers to a period of sustained expansion". The period of growth includes increased consumer confidence, which translates into higher levels of business activity".

Finally there is the DECLINE often referred to as the downturn; this phase "Marks the end of the period of growth in the business cycle". "Declines are characterised by decreased levels of consumer purchases (especially of durable goods) and, consequently, reduced production by businesses".

It should be noted that the use of the term cycle, in the definition of business cycle, suggests that there is some sort of regularity in the progress of the business cycle. Nothing could be further from the truth. The business cycle may vary in duration from two to 12 years, although it is thought that most cycles average about six years in length. In addition, the amplitude of the peaks and troughs of a cycle vary considerably from period to period.

The period or length of the business cycle refers to the period between two similar turning points; i.e., from decline to decline or from recovery to recovery. It will no doubt come as a surprise to many that the Business Cycle Dating Committee of the American National Bureau of Economic Research states that the current recession in the United States began in December 2007 and hence has been in existence for at least 14 months. This makes it the longest recession that America has experienced in 25 years.

For Bermuda, the current recession in the United States is having a very visible influence on the Bermuda economy through its impact on the International Companies that have been arriving here in increasingly greater numbers in recent years. Very recently, we have seen one of the largest — AIG — being forced to receive survival assistance from the United States government while other major players — notably ACE and XL — are rumoured to be leaving Bermuda and moving to Switzerland.

Moreover, there is the additional concern that this recession is seriously affecting the 'American demographic, upon which we depend, for the survival of our tourist industry. We refer, of course, to those American households who earn in excess of $250,000 per annum.

When an economic downturn impacts on the major players in the financial services sector, we can rest assured that it is having an impact on the target group of our tourist sector. The extent, to which this is true, will become increasingly clear to everyone as we enter the peak of the tourist season very shortly.

Clearly, since the industries upon which Bermuda depends are very fragile, this has led some people to conclude that the American recession has the potential of having a far more serious impact upon the Bermudian economy than would be true with respect to the economies of the islands to the south.

However, there are also local analysts who argue that historically, recessions in the United States usually cause only a minor decline in economic activity in Bermuda, if any.

Still, confidence in the ability of Bermuda to survive the recession easily should be exercised with due caution. Bermuda is related to our major trading partner in the first instance because the greater part of our exports (financial and tourist services) is produced by American corporations and furthermore, the product is purchased by American residents.

And if that is not enough, we need to acknowledge that the greater part of our consumer goods is imported from that country. These facts regarding the heavy American influence with respect to the production, sale and consumption of goods and services in Bermuda clearly indicate that Bermuda is necessarily very vulnerable to major fluctuations in the national economy of the United States.

Further, to the extent that the major international financial services sector reduces its activity in Bermuda, there will be corresponding decreases in the income of local landlords, staff employed by these companies and the local retail outlets that cater to this sector.

What has been said to date can be described as the logical reactions to the American recession. This is the result when businesses and consumers react to a fall in real incomes resulting from a fall in sales and hence profits; which, in turn, results in layoffs and a further overall fall in real income.

But what about the impact of the stimulus exercises initiated by US President George Bush and continued by US President Barak Obama? We believe the following: Since the recovery of the United States depends significantly upon the impact of the various government strategies upon the confidence of the American consumers and businesses, President Obama may have more success than President Bush in his efforts to stimulate the American economy.

I draw this conclusion on the basis that President Obama took over as Commander in Chief of the United States with stronger public support than any other President of post-Second World War America.

This is important because in order for the government injection of funds to have maximum effect in stimulating the economy, the exercise must not only increase the spending power of Americans, it must also restore their confidence that the stimulus strategy will improve the chances of a rapid recovery of the economy of their country.

God knows, the whole world awaits the outcome with bated breath.