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A recession is a significant decline in economic activity in a given region that lasts for an extended period of time. In recent decades, experts have disagreed on whether falling gross domestic product (GDP) is enough to indicate a recession.
When a country experiences negative GDP, rising unemployment, and falling levels of retail sales, manufacturing, and personal income for a long period of time, experts are typically willing to declare a recession. Read on to find out why recessions are considered a normal part of the economic cycle.
What is a recession?
The recession definition used to be identified by two consecutive quarters of negative GDP growth. In recent years, the National Bureau of Economic Research (NBER), which officially declares recessions in the United States, defines a recession as a significant decline in economic activity spread across the economy. NBER states that this decline must last more than a few months and be visible in real GDP, real income, employment, industrial production, and wholesale-retail sales before it will declare a recession.
Understanding Recessions
The economy of most countries has been growing steadily since the Industrial Revolution. But what goes up, must come down—at least for a short time! Short-term fluctuations in economic performance, known as recessions, have punctuated this long-term upward trend in most countries. After about six months to a year of economic downturn, the business cycle usually trends back up. That is the business definition of recession in a nutshell.
While the economic pain caused by recessions is temporary, the changes caused by recessions can have lasting effects on a country’s entire economy. Sometimes major policy changes in response to a recession can rewrite the rules for doing business.
What causes recessions?
There are many ways recessions get started. Some of these include:
- Excessive debt: One recession example is the mortgage crisis in the mid-2000s where individuals couldn’t repay their mortgage loans.
- Inflation: When the Federal Reserve Bank raises interest rates, prices can rise fast while the value of a dollar stays steady.
- Asset bubbles: Human emotions can irrationally inflate the price of a particular stock or asset, like real estate or technology. When reality sets in, bubbles pop, and investors panic.
- Deflation: When a deflationary feedback loop gets out of hand, spending stops.
- Technological change: Some economists are concerned that automation and AI could cause recessions by eliminating entire professions and categories of jobs.
- Sudden economic shock: Another recession example is the COVID-19 pandemic, where, overnight, the entire global economy and supply chain changed.
In the case of the COVID-19 pandemic and lock-downs, it may be that other economic trends were at work leading toward a recession at the time the pandemic struck. In that case, an economic shock like a pandemic triggered the recession that was already about to happen.
Recession vs. Depression
In the last 40 years, there have been five recessions in the United States. There are no specific criteria to distinguish a “depression” from a “recession” according to NBER. Instead, a depression is defined as a severe economic decline that lasts for many years.
Recession: Summary
- A recession is an extended period of declining economic performance across an entire economy.
- Many different stakeholders confirm and track economic performance and recession indicators, but recessions are officially declared by the National Bureau of Economic Research.
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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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