What is a Recession?

GOLDSTONE LEARN

Different profit, Smarter profit. The works of our authors have appeared in the magazines of the whole world.

DEFINITION:

A recession is a significant economic downturn that affects many industries and lasts longer than a few months.

Understanding recessions

A recession is a significant and broad decline in economic activity that lasts for a period of time, usually at least a few months. Some economists define a recession as two consecutive quarters of inflation-adjusted decline in gross domestic product (the value of everything the country produces within its borders). During a recession, unemployment tends to rise and inflation tends to fall. Although recessions can be painful for consumers and businesses, they are a normal part of the business cycle and are usually short-lived. In the U.S., the National Bureau of Economic Research (NBER) officially documents when recessions begin and end. The most recent recession began in February 2020 and ended in April 2020, making it the shortest recession in U.S. history.

EXAMPLE

The last major recession in the U.S., which lasted until 2020, was from December 2007 to June 2009, known as the “Great Recession,” and was the longest slump in economic activity in the U.S. since World War II II. The Great Recession occurred after many homeowners defaulted on their mortgages – that’s, they stopped making payments. If you’ve heard of the “subprime mortgage crisis,” it refers to this period when many homebuyers received loans for which they likely wouldn’t have qualified.
As foreclosures increased, banks ran into financial difficulties and stopped lending. Unable to borrow, businesses were forced to cut costs and investments, leading to layoffs and further limiting consumer spending. Millions of Americans lost their homes and jobs, and poverty rates rose.

Takeaway

A recession is kind of like driving your car downhill…

When you go uphill, you can’t go uphill forever – eventually you reach a peak and it’s back downhill. The same is true of the U.S. economy. It’s normally in a state of growth (going uphill), but slumps are a normal part of the cycle. When the car (the economy) goes down a big hill for quite a while, it’s comparable to a recession. At some point, the terrain flattens out, and the car starts going uphill again.

Scroll to Top