We will start our discussion by defying the recession as a rapid economic decline, the slow down which may last for months or years. A recession can happen when an economy experiences decline as a result of many factors, including negative gross domestic product GDP, rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time. Most importantly, during the time of recession, the economy struggles, people lose job, the business activities, including sales and revenue, declines and also the entire country’s overall economic output declines.
In 1974, an economist Julius Shiskin, considered a two consecutive quarters declining gross domestic product GDP of an economy, as a recession. However, there are other definitions of recession as well. For instance, the United States National Bureau of Economic Research NBER of what constitutes a recession, namely a significant decrease in economic activity, such as gross domestic product GDP, real income, employment, industrial production, and wholesale-retail sales, over less than a year.
The above tow definitions are similar in some extend, but the Julius Shiskin definition is more conservative. For example, according to National Bureau of Economic Research NBER the coronavirus negative impacts on the growth considered to be a recession, where the economy falls one quarter, starts to grow, then declines again. This would not be a recession by Shiskin’s rules.
What Are The Reasons Of Recessions
There is more than one cause for a recession to occur. The following are some of the main drivers of a recession:
- A sudden economic shock: An economic decline or a surprise problem that creates serious financial damage. For instance, in the 1970s, OPEC suddenly stopped supply of oil to the United States, causing a recession. And the COVID-19 pandemic that started in 2020, which shut down the global economies.
- Excessive debt: When individuals or businesses become under heavy debts, then the cost of servicing the debt can grow to the point where they fail to make a repayment of the loans. Growing debt defaults and bankruptcies then capsize the economy. The housing bubble in 2008 that led to the Great Recession is an example of excessive debt causing a recession.
- Asset bubbles: In the stock market in the late 1990s, investors become too optimistic during a strong economy growth. Their investing decisions were motivated by emotion, they experienced loses, and financial problem.
- High inflation: Central banks control inflation by raising interest rates, and higher interest rates depress economic activity. The worst inflation was an in the 1970s in the United States. To reduce the inflation, the United States Federal Reserve dramatically raised interest rates, which caused a recession.
- Deflation: As contrary to the inflation, the deflation is when prices decline over time, causing wages to decline, which further depresses prices. One example of deflation is Japan’s struggles with deflation throughout most of the 1990s caused a severe recession.
- Technological change: New inventions increase productivity and help the economy over the long term, but there can be short-term periods of adjustment to technological development. In the 19th century, there were waves of labour-saving technological improvements. The Industrial Revolution made entire professions out of date, sparking recessions and hard times. Recently, some economists worry that robots could cause recessions by eliminating some categories of jobs.
How Long The Recessions Impacts Remain On The Economy
While tracking the average length of United States recessions the period between 1945 to 2009, the average recession lasted 11 months. However, the effect of the recession has last longer from 1854 to 1919, which lasted for 21.6 months. Over the past three decades, the United States has gone through four recessions, starting from the recent one:
- The Covid-19 Recession, which began in February 2020 and lasted only two months, making it the shortest recession in the United States history.
- The Great Recession, started between December 2007 to June 2009. The Great Recession was caused partially by a bubble in the real estate market in the United States. However, the effect of the Great Recession wasn’t as severe as the Great Depression.
- The Dot Com Recession, between March 2001 to November 2001. During that period, the United States faced several major crises, including the tech bubble crash , accounting scandals at major companies, such as Enron, and the September 11th terrorist attacks. However, the impact of the recession period on the economy was shorter.
- The Gulf War Recession, between July 1990 to March 1991. At the start of the crisis, the United States went through eight-month recession, partly triggered by spiking oil prices during the First Gulf War.
Can Recession Be Predicted
It is difficult to predict a recession that caused by sudden event, such as the, COVID-19 which appeared unexpectedly in early 2020, and within a few months the global economy declined and unemployment raised significantly.
However, we can predict indicators of looming recession. The following warning signs can give you more time to figure out how to prepare for a recession before it happens:
An inverted yield curve: The yield curve is a graph that plots the market value of types of the United States government bonds, from notes with a term of four months to 30-year bonds. When the economy is functioning normally, yields should be higher on longer-term bonds. But when long-term yields are lower than short-term yields, it shows that investors are worried about a recession. This phenomenon is known as a yield curve inversion. Historically, the yield curve inversion proven to be one of recession indicators.
Declines in consumer confidence: Consumer spending is the main driver of the global economy. If survey shows a sustained declines in consumer confidence, it could be a sign of upcoming trouble for the economy. By decreasing of the consumer confidence, means households are not feeling confident spending money. Generally, if follow through on their fears they will lower their spending, lower spending slows down the economy.
A drop in the Leading Economic Index (LEI): which issued every month by the Conference Board, the Leading Economic Index LEI strives to predict future economic trends. It illustrate on most economic factors, such as applications for unemployment insurance, new orders for manufacturing and stock market performance. If the Leading Economic Index LEI declines, trouble may appear in the economy.
Sudden stock market declines: A large or sudden decline in stock markets could be a sign of a recession coming on, since investors sell off parts or all of their holdings in anticipation of an economic slowdown.
Rising unemployment: the rising of unemployment is a negative sign for the economy, therefore, consider to be among recession indicators.
How Does a Recession Affect Household
As a result of rising unemployment rate, people would be affected by losing their jobs during a recession. Not only are more likely to lose current job, it also becomes increasingly harder to find a new job since more people are losing their position. Worst, even people who keep their jobs during the recession may experience lower benefits.
Moreover, investments in stocks, bonds, real estate and other assets can lose value, reducing your savings and upsetting your plans for retirement.
Business owners make fewer sales during a recession, and therefore may even be forced into bankruptcy, even though government introduces financial supports.
With more people unable to pay their bills during a recession, lenders tighten standards for mortgages, car loans and other types of financing. Borrowers need a better credit score or a larger down payment to qualify for a loan.
What’s The Difference Between a Recession and a Depression
Both the recessions and depressions have similar causes, but the overall impact of a depression is worse than the recession. When depression occur, there are high number of job losses, higher unemployment and deeper declines in gross domestic product GDP, than the recession. Generally, a depression lasts longer than the recession and its takes more time for the economy to recover. In the past century, the United States has faced just one depression, which was the Great Depression. The Great Depression was a severe worldwide economic decline between 1929 and 1937 that began after a major fall in stock prices in the United States.
What Is The Great Depression
The Great Depression happened from 1929 to 1933, and its effects continued through 1937. During the depression period, unemployment increased to 25 percent and the gross domestic product GDP decreased by 30 percent. It was the most unprecedented economic collapse in modern United States history.
The Great Recession, which started in December 2007 to June 2009, was the worst recession since the Great Depression. During the Great Recession, unemployment raised to 10 percent. However, during the COVID-19 that caused a short recession, the unemployment increased to 14.7 percent in May 2020, which is the worst level seen since the Great Recession.
How To Prepare For A Recession
- Reduce spending. One of the hardest parts of a recession is not knowing what comes next, and when things will get better. That’s why it’s important to be clear about where you stand financially. Therefore, reducing spending, to prepare for unknown situation, would be a wise decision.
- Pay your debts. The biggest worry people citied about a looming recession is the inability to pay their debts. There are proactive steps individuals can take now to get themselves in a better financial position before a recession happen. Paying down debt as a way, to get your finances ready for an economic downturn, is consider to be the most important step.
- Increase your emergency funds. You must be well-prepared for a recession, a job loss or other financial hurdle, by saving or putting aside an emergency fund that covers basic monthly living expenses, including food, shelter, health insurance, transportation and childcare, for at less three to six months.
- Consider your career opportunities. Recessions often result in high levels of unemployment. So, it’s important to consider how tough economic times could affect your career and have a backup plan should you face a layoff.