What is a recession, what causes it and what happens during an economic downturn? (2024)

FAQs

What is a recession, what causes it and what happens during an economic downturn? ›

A recession is a trend of simultaneously slowing business and consumer activity, leading to negative growth as measured by gross domestic product (GDP) and other data series, such as the unemployment rate, wage growth, and the like.

Recessions are the result of shocks to aggregate supply or aggregate demand in the economy or both. A supply shock occurs when something reduces the economy's ability to produce output at a given price level.

A recession is a meaningful and extensive downturn in economic activity. A common definition holds that two consecutive quarters of decline in gross domestic product (GDP) constitute a recession. In general, recessions bring decreased economic output, lower consumer demand, and higher unemployment.

What happens during a recession and how would it affect me? During a recession, there's less money circulating: less money for workers from their employers, less money being spent in shops and restaurants, and less money going to the government in tax from wages to pay for things like benefits and public services.

The Great Recession devastated local labor markets and the national economy. Ten years later, Berkeley researchers are finding many of the same red flags blamed for the crisis: banks making subprime loans and trading risky securities.

While the prices of individual items may behave unpredictably due to unexpected economic factors, it is true that a recession might cause the prices of some items to fall. Because a recession means people usually have less disposable income, the demand for many items decreases, causing them to get cheaper.

This usually results in job losses and an increase in the unemployment rate. While there is no single definition of recession, it is generally agreed that a recession occurs when there is a period of reduced output and a significant increase in the unemployment rate.

As energy becomes expensive, it pushes up the overall price level, leading to a decline in aggregate demand. A recession can also be triggered by a country's decision to reduce inflation by employing contractionary monetary or fiscal policies.

During an economic downturn, it's crucial to control your spending. Try to avoid taking on new debt you don't need, like a house or car. Look critically at smaller expenses, too — there's no reason to keep paying for things you don't use.

What happens to house prices in a recession? While the cost of financing a home increases when interest rates are on the rise, home prices themselves may actually decline. “Usually, during a recession or periods of higher interest rates, demand slows and values of homes come down,” says Miller.

Who benefits in a recession? ›

Lower prices — A recession often hits after a long period of sky-high consumer prices. At the onset of a recession, these prices suddenly drop, balancing out previous long inflationary costs. As a result, people on fixed incomes can benefit from new, lower prices, including real estate sales.

Cash. Cash is an important asset when it comes to a recession. After all, if you do end up in a situation where you need to pull from your assets, it helps to have a dedicated emergency fund to fall back on, especially if you experience a layoff.

Another way recessions affect the average person is that credit access all too often declines. Even if you have the income to support a loan now, lenders are warier of handing out money when everyone's job security is on the line. They may more heavily scrutinize your financials, credit score and credit history.

Inflation, which can be driven by high demand, can often be a byproduct of an economy that is still growing, he noted. But “neither is really great,” he said — and it's understandable why inflation might be just as frustrating for consumers as a recession. “Objectively, a recession does more overall damage,” he said.

According to the National Bureau of Economic Research (NBER), the average length of recessions since World War II has been approximately 11 months. But the exact length of a recession is difficult to predict. In general, a recession lasts anywhere from six to 18 months.

The last time the U.S. experienced a recession was in 2020. But that was a relatively short recession. The biggest recession in U.S. history sparked the Great Depression, between 1929 and 1933, though the Great Recession (2007-2009) was the worst in modern times.

Toothpaste, deodorant, shampoo, toilet paper, and other grooming and personal care items are always in demand. Offering these types of items can position your business as a vital resource for consumers during tough times. People want to look good, even when times are tough.

Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit. Money market funds and high-yield savings are also places to salt away cash in a downturn.

Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution. What happens if my bank fails during a recession?

Which is worse inflation or recession? ›

Inflation, which can be driven by high demand, can often be a byproduct of an economy that is still growing, he noted. But “neither is really great,” he said — and it's understandable why inflation might be just as frustrating for consumers as a recession. “Objectively, a recession does more overall damage,” he said.

What businesses are profitable in a recession? Many investors turn to stocks in companies that sell consumer staples like health care, food and beverages, and personal hygiene products. These businesses typically remain profitable during recessions and their share prices tend to better resist stock market sell-offs.

Following these policies, the economy gradually recovered. Real GDP bottomed out in the second quarter of 2009 and regained its pre-recession peak in the second quarter of 2011, 3½ years after the initial onset of the official recession. Financial markets recovered as the flood of liquidity washed over Wall Street.

The COVID-19 recession was the shortest on record, while the Great Recession of 2007-2009 was the deepest since the downturn in 1937-1938.