What Is a Recession? (2024 Guide) (2024)

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What Is a Recession?

A recession is a nationwide economic slowdown, measured by factors such as industrial production, employment and income.

Experts at the National Bureau of Economic Research are responsible for identifying and labeling recessions in the U.S., reviewing data each month to make a determination.

During a recession, businesses may sell fewer products, leading to layoffs and decreased wages. As a result, consumers tend to save their money rather than spend it, further dampening their contribution to the economy.

This domino effect creates financial hardships that can affect the entire world. Governments respond to these recessions by altering fiscal policies to boost economic growth. The following are some measures policymakers may implement to deal with a recession:

Lowering interest rates
Implementing tax cuts
Increasing government spending
Increasing money supply

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What Causes a Recession?

Nations naturally pass through economic cycles of growth and contraction, and recessions are a normal part of this process.

Leading Indicators of a Recession

Economists rely on various economic indicators, such as gross domestic product (GDP), to gauge the health of an economy and spot potential signs of an impending recession. One prevailing rule of thumb to define a recession is two consecutive quarters of declining GDP, but economists generally view a 2% decrease in GDP as a reliable indicator of a recession. Other crucial indicators include the following:

Unemployment rates
Consumer spending
Industrial production
Performance of financial markets

In addition to these trends, economists analyze a variety of other indicators to anticipate recessions. For instance, prolonged declines in stock prices can indicate a loss of investor confidence and a potential economic slowdown.

External factors such as financial crises, geopolitical tensions and fluctuations in global commodity prices can also destabilize financial markets and exacerbate recessionary pressures.

Global Financial Crisis

The 2008 global financial crisis was ignited by the collapse of the U.S. housing market. The collapse was triggered by a combination of factors, including subprime mortgage lending, housing speculation and lax regulations around lending. As housing prices plummeted, millions of homeowners found themselves underwater on their mortgages, leading to a wave of foreclosures and a foundering of the mortgage-backed securities market. This event triggered a severe recession that rippled across the globe.

What Happens During a Recession?

During a downturn, consumer spending typically shrinks. This translates into decreased consumer demand for goods and services, forcing businesses to adapt. Companies need fewer workers, which leads some businesses to resort to cost-cutting measures such as hiring freezes, pay cuts or even layoffs.The stock market (often seen as a barometer of economic confidence) tends to plunge during recessions. Investor pessimism about the future leads to selling sprees, which drive down stock prices. This can devastate retirement savings and investment portfolios, further dampening consumer confidence and hindering economic recovery. For example, the 2008 recession saw the Dow Jones Industrial Average lose nearly half its value, according to the Federal Reserve Bank of Atlanta. As a result, thousands of Americans who had invested their savings into the stock market suffered a great financial loss.

The Great Depression

The Great Depression exemplifies what happens during a prolonged recession. Triggered by the stock market crash in 1929, the Great Depression of the 1930s saw unemployment skyrocket to 25%. Many businesses closed their doors and poverty became widespread. This not only impacted individual livelihoods but also reduced overall economic activity since laid-off workers did not have the capital to invest back into the U.S. economy.

While history can serve as a dark reminder of the negative effects of a recession, it’s important to remember that a recession is not permanent and that the economy eventually recovers.

Government interventions, such as stimulus packages and infrastructure investments, can play a role in mitigating the recession’s impact and accelerating recovery. Additionally, some businesses emerge stronger from recessions, having adapted and innovated to survive the downturn.

How To Survive a Recession

Navigating a recession can seem daunting, but there are strategies that both businesses and individuals can employ to foster financial resilience.

Individuals

On an individual level, the ways to adapt to a recession are the same steps you’d take to put your finances in order during tranquil economic times:

Create a budget
Track spending
Build an emergency fund of three to six months’ worth of living expenses
Reduce high-interest debt like credit cards
Pay bills on time to keep your credit up
Seek additional personal income through freelance opportunities or side hustles
Develop new skills to enhance earning potential

If a recession is particularly impactful to your finances, proactively communicating with creditors and negotiating payment plans can help individuals avoid defaults and make arrangements to get through difficult times.

Businesses

For businesses, it’s essential to focus on efficiency by doing the following:

Streamlining operations
Reducing costs
Optimizing resource allocation to adapt to the hardships

Successful companies analyze changing consumer needs and adapt their products accordingly. They might offer more affordable options or diversify product lines. Businesses that can weather recessions strengthen ties with suppliers, customers and partners to create a sense of community and mutual reliance.

The Bottom Line: What’s a Recession?

A recession signifies a significant economic downturn over an extended period. It affects various aspects of life from employment to consumer spending, and it can have widespread implications for individuals, businesses and governments alike. Even though recessions are a normal part of business cycles, they can bring significant challenges and disruptions.

Individuals and businesses must stay informed and prepared for economic uncertainties. By monitoring key economic indicators and understanding the signs of a looming recession, consumers and companies can take proactive steps to mitigate its impacts. This includes maintaining a robust financial plan, diversifying income sources and staying adaptable in the face of changing market conditions.

FAQ: Economic Recession

For many, a recession brings increased uncertainty and potential financial hardship. Job losses become more common, leading to reduced personal income and strain on household budgets. Spending often decreases as people prioritize essential needs, impacting businesses and further slowing the economy. Additionally, access to credit may tighten, making it harder to borrow money for major purchases or emergencies.

While some prices may decrease during a recession due to reduced demand, this isn’t always the case. Retail sales prices of certain goods and services may fall as businesses try to attract customers. However, essential items like food and health care may see less price reduction compared to discretionary items. Overall, the impact on prices during a recession can vary depending on the specific economic conditions.

Recessions are periods of economic downturn marked by the following:

Decline in real GDP
Increased unemployment
Reduced consumer and business spending

This often translates to reduced economic activity where businesses struggle and consumer spending falls. The stock market often plunges as investor confidence wanes. Government intervention and individual adaptation become key strategies for maneuvering the shifting economy.

Divi SharmaContributor

Divyakshi Sharma is a professional copywriter and a proud North Carolina State University graduate. Divi is the CEO and founder of Writeable: A Copywriting Agency and works with a variety of different brands, including Atlas Obscura, Bigmouth Copy and Gale Creative Agency. While her 9-to-5 is running her own business, her weekends are filled with hiking, yoga, reading Letterboxd reviews and conducting mostly successful food experiments.

David GregoryEditor

David Gregory is a sharp-eyed content editor with more than a decade of experience in the financial services industry. Before that, he worked as a child and family therapist until his love of adventure caused him to quit his job, give away everything he owned and head off to Asia. David spent years working and traveling through numerous countries before returning home with his wife and two kids in tow. His love of reading led him to seek out training at UC San Diego to become an editor, and he has been working as an editor ever since. When he’s not working, he’s either reading a book, riding his bicycle or playing a board game with his kids (and sometimes with his wife).