What Happens During a Recession?

A recession is expected to occur in the U.S. within the next year or so in response to high inflation and interest rates according to news from Blooomberg. Recessions can be a stressful time for most with financial insecurity also affecting mental health. It is important to plan for economic downturns as they are considered an unavoidable part of the business cycle. 

What is a Recession?

A recession is when the country’s economy declines, unemployment rates increase, and companies make fewer sales. Recessions are considered a natural and unavoidable part of the business cycle which consists of ups and downs in broad measures of economic activity. The National Bureau of Economic Research (NBER) has the responsibility of officially determining when a recession begins and ends, which lasts an average of 1.5 years.  

Factors that Cause a Recession

There are many factors that can lead to and contribute to a recession. A recession is confirmed when the nation’s Gross Domestic Product (GDP) declines for two consecutive quarters (six months) and can be caused by many different variables including but not limited to: 

• A sudden economic shock: The coronavirus outbreak is an example of a sudden economic shock that shut down economies worldwide.
• Excessive debt: When individuals or banks cannot pay their debts, growing debts and bankruptcies capsize the economy. 
• Asset bubbles: An asset bubble occurs when the price of an asset (cush as stocks, bonds, real estate, or commodities) rises at a rapid pace beyond a reasonable value. Eventually, the bubble “bursts” when prices crash and demand falls, leading to a recession. 
• Too much inflation: Excessive inflation–an upward trend in prices over time–can cause a recession. Inflation is controlled by central banks that raise interest rates which can cause a decline in economic activity. 
• Too much deflation: Deflation is when prices decline over time, which causes wages to contract and further lowers prices. People and businesses then stop spending money, leading to a recession.
• Technological shift: In the long-term, new technologies often increase productivity and the economy, however, short-term adjustments to new technologies can spark a recession. For example, the Industrial Revolution made many jobs obsolete. 

Difference Between a Recession and Depression

While the factors that cause a recession are similar to what causes a depression, the overall impact of a depression is much worse and lasts longer than a recession. While a recession can last a few months, a depression lasts years. Unemployment during a depression is much higher and GDP declines faster.