Anxiety over recent economic changes is strong because the Great Recession of 2007 to 2009 is still uncomfortably fresh in the minds of too many families, as are its aftereffects. The Bureau of Economic Analysis reported today that the U.S. economy shrunk once more in the second quarter of this year, and many experts and regular Americans believe a recession is imminent. You might be one of them or you might be unsure of how alarmed you ought to be by terms like “gross domestic product” and “recession” alone.
Don’t give up. Let’s go through some of the economic phrases you should be familiar with because knowledge is power. The Federal Reserve Bank of St. Louis, CORE Econ, and The Economist are the sources for these expressions.
Well, in this article, you’ll have an understanding of what recession is, how it affects the economy, and some common terms you should about recession. The answers to the following questions will be discussed:
- What is a recession?
- What happens in a recession?
- What are the causes of recession?
- What is the difference between recession and depression?
- What are the common terms one should know about recession and their meaning?
- How long will a recession last?
- Can someone predict a recession?
- How does the recession affect individuals and citizens?
Let’s dive in!
What is a recession?
In a recession, businesses struggle to sell products, people lose their jobs, and the nation’s overall economic output falls. Several variables affect when the economy enters a recession officially.
Julius Shiskin, an economist, developed the following general guidelines in 1974 to describe a recession: Two straight quarters of falling GDP was the most well-liked example. According to Shiskin, a healthy economy grows over time, thus two quarters in a row of declining output point to significant underlying issues. Over time, this definition of a recession became the accepted norm.
It is generally agreed that the National Bureau of Economic Research (NBER) is the source of information on the beginning and end dates of U.S. recessions. A recession is defined by the NBER as “a large fall in economic activity distributed across the economy, lasting more than a few months, typically visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
The NBER’s definition of a recession is more open-ended than Shiskin’s guideline for defining one. For instance, the coronavirus can potentially cause a W-shaped recession, in which the economy declines for a quarter, then begins to expand before declining once more in the next quarter. By Shiskin’s standards, this would not qualify as a recession, but the NBER definition may make it one.
Recessions are substantial drops in economic activity that can endure for several months or even years. When a country’s economy faces negative gross domestic product (GDP), growing unemployment, decreasing retail sales, and contraction income and manufacturing metrics over an extended period, experts declare a recession. Recessions are regarded as an inevitable component of the economic cycle or the predictable rhythm of expansion and recession in a country’s economy.
What happens in a recession?
Since the Industrial Revolution, most nations have seen economic expansion, with periodic contractions being the exception. Recessions are the relatively brief corrective stage of the business cycle; they frequently deal with the imbalances in the economy brought on by the expansion that came before them, paving the way for growth to pick up again.
Even though they are a regular occurrence in the economic landscape, recessions have become less frequent and shorter over time. The International Monetary Fund estimates that between 1960 and 2007, 122 recessions impacting 21 advanced economies occurred nearly 10% of the time (IMF).
Recessionary falls in economic output and employment can spiral out of control because they signify a sudden reverse of the generally prevalent rising trend. For instance, the layoffs brought on by less consumer demand affected the income and spending of the recently unemployed, further weakening demand. Similar to the wealth effect, the stock market bear markets that occasionally accompany recessions can reduce consumption that was based on rising asset values and growing net worth. Small businesses would struggle to expand if lenders stopped lending, and some would even go out of business.
Governments all around the world have implemented counter-cyclical fiscal and monetary measures since the Great Depression to make sure that regular recessions don’t worsen and harm their long-term economic prospects.
Some of these stabilizers work automatically, such as increased unemployment insurance spending, which partially makes up for lost wages for laid-off workers. Others, such as interest rate reductions intended to support investment and employment, call for a central bank’s approval, such as the Federal Reserve in the United States.
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What are the causes of recession?
A recession can begin in a variety of ways, such as by an unexpected economic shock or the effects of unchecked inflation. One of the main causes of a recession is one of the following events:
- Sudden economic shock
- Too many depts
- Asset bubbles
- Too much inflation
- Too much deflation
- Technological change
Sudden economic shock
An economic shock is an unexpected issue that causes significant financial loss. In the 1970s, OPEC abruptly stopped supplying oil to the United States, sparking a recession as well as protracted queues at gas stations. A more recent example of a quick economic shock is the coronavirus outbreak, which crippled economies everywhere.
Too many depts
The expense of debt servicing can rise to the point where people or companies who take on excessive debt find themselves unable to make their payments. The economy is then turned upside down by increasing debt defaults and bankruptcies. A recession brought on by excessive debt was most prominently demonstrated by the mid-2000s housing bubble that sparked the Great Recession.
Emotionally motivated investing decisions almost always result in poor economic outcomes. During a booming economy, investors may get overconfident. When characterizing the excessive stock market gains in the late 1990s, former Fed Chair Alan Greenspan is credited with coining the phrase “irrational exuberance” to describe this tendency. Stock market or real estate bubbles are inflated by irrational enthusiasm, and when they burst, panic selling may cause a market crash and a recession.
Too much inflation
The gradual, rising trend in prices is known as inflation. Although excessive inflation is a risky occurrence, inflation itself isn’t necessarily a bad thing. By hiking interest rates, central banks can control inflation, but doing so reduces economic activity. In the 1970s, unchecked inflation was a persistent issue in the United States. The Federal Reserve abruptly increased interest rates to break the cycle, which brought about a recession.
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Too much deflation
A recession can be brought on by uncontrolled inflation, but deflation can be even worse. Deflation occurs when prices drop over time, which lowers wages, which lowers prices even more. When a deflationary feedback loop becomes uncontrollable, consumers and businesses stop making purchases, which hurts the economy. Few resources are available to central banks and economists to address the fundamental issues that lead to deflation. A severe recession was brought on by Japan’s troubles with deflation over the majority of the 1990s.
Over time, discoveries boost productivity and benefit the economy, but there may also be a short period of acclimatization to new developments in technology. There were numerous waves of labor-saving technological advancements in the 19th century. The Industrial Revolution led to recessions and difficult times by rendering entire professions obsolete. Some economists today are concerned that the abolition of entire job categories by AI and robotics could trigger recessions.
What is the difference between recession and depression?
Since 1854, there have been 34 recessions in the United States, according to the NBER. Since 1980, there have been only five. The double-dip recessions in the early 1980s and the global financial crisis of 2008 led to a downturn that was far worse than either the Great Depression or the depression of 1937–1938.
According to the IMF, mild recessions can knock the GDP down by 2% while severe ones can knock an economy back by 5%. There is no agreed numerical formula for defining a depression; it is a particularly severe and protracted recession. Economic output in the United States fell by 33% during the Great Depression, while stock prices fell by 80% and the jobless rate rose to 25%.
Real GDP fell by 10% during the depression of 1937–1938, while the unemployment rate increased to 20%.
The Great Depression began in 1929 and lasted until 1933, but the economy didn’t start to recover until almost ten years later, during World War II. The GDP decreased by 30% and unemployment increased to 25% during the Great Depression. It was the most extreme economic downturn in contemporary American history.
Since the Great Depression, the Great Recession has been the worst recession on record. The Great Recession officially ran from December 2007 to June 2009, or around one and a half years, with an unemployment rate peaking at nearly 10%. Depending on how long it persists, some analysts worry that the coronavirus recession might turn into a depression. In May 2020, the unemployment rate reached 14.7 percent, which is the highest level since the height of the Great Recession.
Although the causes of both recessions and depressions are similar, a depression has much, much worse overall effects. Greater job losses, higher unemployment, and sharper GDP decreases are all present. A depression lasts for years rather than months, and it takes longer for the economy to recover.
For what constitutes a depression, economists do not have a predetermined definition or standard measurements. It is sufficient to mention that all the effects of depression are more severe and persistent. The Great Downturn was the only depression the United States has seen in the last century.
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What are the common terms one should know about recession and their meaning?
The following are the common terms that you should know about the recession:
- Absolute advantage
- Adjustment gap
- Bank bailout
- Bargaining gap and bargaining power
- Broad money
- Consumer price index (CPI)
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If the inputs used to manufacture a good are less than those of another person or country, that person or country has an absolute advantage. Any resource utilized to produce goods or services, such as labor, supplies, or equipment, is referred to as an input (as described below).
This is the period that passes between an external change in the labor market’s dynamics and the subsequent movement of the economy toward equilibrium. Alternatively, how long it takes for the market to adapt to a new situation, such as a labor shortage.
This is the technique of getting a product for cheap in one market and then selling it for more in another. In essence, traders profit from reduced prices in one country or territory by bringing the commodities they purchased at a lower price to a country or location where they can sell those goods for a higher profit. They will make money if the cost of trading is less than the price difference. Stocks also make use of this phrase. Shares listed on the New York Stock Exchange and the London Stock Exchange, for instance, can be arbitraged.
A valuable possession is referred to as an asset. It will have the financial potential for the owner or some other benefit. It is expected that the person, business, or nation who possesses an asset will benefit from it in the future. For example, if you possess a home, that is an asset.
A bank bailout, which will sound familiar to anyone who has heard of the Great Recession, is when the government of a nation purchases stock in a bank or takes other action to stop it from failing. You may also hear the phrase “capital injection” used while talking about bailouts, which has a similar meaning.
When a court finds that a debtor is unable to make payments to a creditor, this happens. The bankruptcy code in America safeguards businesses from their creditors and is helpful to borrowers. In other nations, failing businesses are put out of business more swiftly, and debts are paid back through the sale of assets. Each nation’s bankruptcy laws are crucial to its economic health because not only are unpaid bills bad for business profits but so is discouraging aspiring entrepreneurs.
Bargaining gap and bargaining power
Although economics is a complicated subject, workers are the driving force behind earning and spending money. Workers can bargain to some extent (especially if they are organized), making use of their value as an economic engine for personal gain. The actual wage that businesses wish to pay their employees to motivate them to perform their duties and the real wage that enables them to maximize profits is what is known as the negotiating gap. The level of a person’s advantage in obtaining a larger share of earnings is known as their bargaining power.
This is a particular class of interest-bearing financial asset where the issuer guarantees to pay the holder a specific sum over time. Governments, businesses, and other specialized organizations all issue bonds as a different way to raise money from investors besides stock sales and bank loans.
All money in circulation is referred to here, including both bank and non-bank public money.
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The American economic system is as follows. The company is the most common type of economic organization, where private capital owners employ workers to generate goods and services to turn a profit. Private property, markets, and businesses are the main economic institutions of capitalist economies.
Cash or liquid assets that are kept on hand or acquired for spending are referred to as capital. Anything that a business owns that is worth money is included in this. Capital is the budgeting term for financial flow. It is the amount of money utilized to launch a business, make investments to increase wealth, or purchase assets.
Consumer price index (CPI)
This serves as a gauge for the average cost of products and services for customers. It gauges the typical change in prices paid over time.
A transaction involving credit is one in which one of the parties—the creditor or lender—gives the borrower money, products, services, or security. The borrower guarantees that he or she will repay the loan in full in the future in exchange. You presumably already know about credit cards and your credit score, so you understand the concept.
Other terms include:
Gross domestic product (GDP)
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How long will a recession last?
The NBER keeps track of how long U.S. recessions typically last. NBER data show that the average length of a recession from 1945 to 2009 was 11 months. Compared to prior times, this is an improvement: The average length of the recession from 1854 to 1919 was 21.6 months. The United States has had four recessions over the previous 30 years:
The recession of Covid-19. The most recent recession began in February 2020 and lasted only two months, making it the shortest U.S. recession in history.
A major recession (December 2007 to June 2009). As previously indicated, a real estate market bubble contributed to the Great Recession. Although the Great Recession wasn’t as bad as the Great Depression, it still got the same name because of its length and devastating impacts. The Great Recession lasted 18 months, about twice as long as other recessions in the United States.
The Dot Com Crash (March 2001 to November 2001). At the turn of the millennium, the United States was dealing with several significant economic issues, including the aftermath of the collapse of the tech bubble and accounting scandals at firms like Enron, which were then followed by the 9/11 terrorist attacks. These issues combined to cause a temporary recession, from which the economy soon recovered.
The Gulf War Downturn (July 1990 to March 1991). The United States had a brief recession at the beginning of the 1990s that lasted eight months and was partially brought on by the First Gulf War’s spike in oil prices.
Can someone predict a recession?
Future recessions are difficult to foretell because economic forecasting is unpredictable. As an illustration, COVID-19 arrived in early 2020 seemingly out of nowhere, and within a few months the U.S. economy had nearly collapsed and millions of people had lost their jobs. The NBER has formally recognized a coronavirus-related U.S. recession, noting that the economy started to decline in February 2020.
However, there are signs of impending trouble. You may have more time to decide how to get ready for a recession before it occurs if you are aware of the warning signs listed below:
- An inverted yield curves
- Declines in consumer confidence
- A drop in the Leading Economic Index (LEI)
- Sudden stock market declines
- Rising unemployment
An inverted yield curves
The market value, or yield, of various U.S. government bonds, from four-month notes to 30-year bonds, is represented on a graph known as the yield curve. Longer-term bond yields should be higher when the economy is running normally. Although it indicates that investors are concerned about a recession when long-term yields are lower than short-term yields. A yield curve inversion is a phenomenon that has previously been used to forecast recessions.
Declines in consumer confidence
The U.S. economy is mostly driven by consumer spending. Consumer confidence surveys that consistently show a decline could portend approaching economic problems. Consumers who respond to surveys when their confidence is low are expressing a lack of confidence in making purchases; if they act on their anxieties, lesser spending slows the economy.
A drop in the Leading Economic Index (LEI)
The LEI, a publication of the Conference Board, aims to forecast future economic trends. It takes into account things like stock market performance, new manufacturing orders, and applications for unemployment insurance. If the LEI falls, potential economic problems may be developing.
Sudden stock market declines
Since investors frequently sell all of their holdings in preparation for a recession, a significant, abrupt collapse in the markets could be a warning indication of one start.
Without a doubt, it is a poor indication for the economy if people are losing their employment. Even if the NBER has not yet formally proclaimed a recession, only a few months of significant job losses are a strong indicator of its imminence.
How does the recession affect individuals and citizens?
As unemployment rates rise during a recession, you can lose your job. Because more individuals are unemployed, it becomes much tougher to obtain a job replacement in addition to being more likely that you would lose your existing one. Those who keep their positions may experience pay and benefit reductions and find it difficult to negotiate pay increases in the future.
A recession can cause investments in stocks, bonds, real estate, and other assets to lose money, lowering your savings and disrupting your retirement plans. Even worse, you can risk losing your home and other possessions if you are unable to pay your expenses as a result of losing your work.
During a recession, business owners have lower sales and could even be forced into bankruptcy. It’s challenging to keep everyone solvent during a severe downturn, but the government tries to help businesses during these trying times, like with the PPP during the coronavirus epidemic.
During a recession, lenders tighten requirements for mortgages, auto loans, and other forms of finance as more people find themselves unable to pay their payments. As would be the case in more normal economic circumstances, you need a higher credit score or a greater down payment to qualify for a loan.
Even with planning, going through a recession can be terrifying. Recessions do not continue forever if there is one thing to take solace in. Even the Great Depression eventually came to an end, and after it did, the United States experienced what is likely its finest period of economic development.
What happens in a recession?
But what does that mean, and how might a potential downturn appear? According to the National Bureau of Economic Research, a recession is “a large fall in economic activity that is dispersed across the economy and that lasts more than a few months.”
What is a recession in simple words?
An economic downturn that affects the entire economy and lasts longer than a few months is known as a recession. This downturn is typically reflected in real GDP, real income, employment, industrial production, and wholesale-retail sales.
Is a recession a good thing?
Recessions are detrimental to both capital and labor. As unit costs rise due to falling demand and severance, corporate earnings decline. Companies with excessive debt risk defaulting, which would increase borrowing costs or eliminate credit for those in a similar situation.
What is an example of a recession?
The 2008 financial crisis-related global recession and the Great Depression of the 1930s, respectively, are the most frequently cited examples of a recession and depression.
How likely is a recession in 2022?
“It’s more likely than not that the real GDP of the United States fell for two straight quarters in the first half of 2022. Bill Adams, a chief economist at Comerica Bank, told Fortune on Friday that this phase “seems more like a depression than an outright recession” unless the U.S. starts to experience outright job losses.
Who suffers the most during a recession?
Many Americans aged 50 and older, notably baby boomers approaching retirement, were impacted either directly or indirectly by rising unemployment, declining property values, and the decrease in the stock market, even while young individuals in their 20s and 30s took the brunt of the economic slump.
Who benefits in a recession?
When renting is expected to become a more enticing alternative, if not the only one, during a recession, rental agencies, landlords, and property management firms can prosper.
How do you survive a recession?
Here are six suggestions to help you stay safe whether or not a recession is on the horizon.
- A bear market is nothing to be feared.
- Avoid attempting to time the market.
- Obliterate your credit card debt.
- Amass your savings.
- Create a reserve for your emergency fund.
- Bonds can be a powerful component of your retirement strategy; don’t undervalue them.
What are the signs of a recession?
Two consecutive quarters of falling gross domestic product, indicating that the economy is contracting rather than expanding, is an unofficial definition of a recession. After seeing rapid growth in the final quarter of 2021, the economy shrank in the first quarter of 2022.
What should you invest in during a recession?
As consumer needs change during a recession, some economic sectors typically function better than others. Industries that typically fare well during recessions include:
- Communication services.
- Consumer discretionary.
- Consumer staples.
- Health care.
- Information technology.
- Real estate
Is a recession coming in 2023?
Brief Dive: According to economists at Fannie Mae, the combination of high inflation and tightening monetary policy would likely cause the U.S. economy to enter a recession in the first quarter of 2023 and contract by 0.4 percent for the entire year.
How long do recessions last?
Review of Past U.S. Recessions
|Recession Year Start||Recession Year End||Recession Duration|
What should you not do in a recession?
What should you not do in a recession?
- Becoming a Cosigner.
- Getting an Adjustable-Rate Mortgage.
- Assuming New Debt.
- Taking Your Job for Granted.
- Making Risky Investments.
How do you get rich in a recession?
Here are some top recession money principles to help you survive a financial crisis:
- Create an emergency fund for 12 to 24 months.
- Cut back on high-interest debt.
- Get ready to take out a loan.
- Keep your credit cards open.
- Stay put if you have low-interest mortgage debt.
- Whenever you can, buy in bulk.
What happens to house prices in a recession?
In the meanwhile, housing costs are likely to remain stable or perhaps rise. “Looking back at the previous six recessions, we see that home prices remained stable or even climbed somewhat while mortgage rates ultimately decreased since that is exactly what happens to mortgage rates during a recession.
Is a recession coming soon?
Do experts anticipate a recession anytime soon? According to Bloomberg Economics, there is a nearly three-in-four chance that a recession would start by the beginning of 2024. One of the first large institutions to predict a recession, Deutsche Bank AG economists now anticipate one to start in the middle of 2023; Wells Fargo & Co.
Should I sell my house before a recession?
In such a case, when is the ideal time to sell a house? This is where things become tough because the ideal moment to sell a house is frequently just before a recession. Although home values can decrease during a recession, they typically reach their peak just before it begins, so it makes sense to sell high and buy low if you can.
Should you buy a house before a recession?
Larger cities experienced the consequences of earlier recessions considerably more quickly. In the end, there is never a bad moment to buy a property provided you have the financial stability to do so. The largest error that most people make is to buy a home that is above their means.
Will the housing market crash in 2025?
Before the supply of available homes catches up with demand, it probably won’t be soon. It will take two years, according to the experts surveyed by Zillow, for monthly inventory to return to pre-pandemic levels. Before the proportion of first-time buyers again reaches the 45 percent recorded in 2019, they predicted it might take until 2024 or 2025.
Why you shouldn’t buy a house now?
There is no way to predict when (or even if) mortgage rates will decrease, which is a significant problem. However, limited inventories in many hot markets imply that won’t generally happen. Higher rates might also restrict people’s purchasing power and restrain the rise in house prices.
Do car prices fall in a recession?
Similar to houses, vehicles see price drops during recessions as a result of decreased demand. As more people put off major moves, prices drop to lure the minority purchasers who do remain.