July 27, 2022
What is a recession?
Talks of an economic recession are growing. With a 9.1% inflation rate, a slowing economy, and volatile stock market, many experts argue the United States is on the verge of a recession in 2022—or may already be in the middle of one.
But what exactly is a recession, what are the causes, and how do these economic periods impact average Americans?
Let’s dive in.
A recession is defined as a significant decline in economic activity that lasts for a few months or even years. As The New York Times does a good job of explaining, a recession is when the economy stops growing and starts shrinking. Experts usually define a recession by two consecutive months of decline in the Gross Domestic Product (GDP)—or the value of all the goods and services produced in the United States.
The National Bureau of Economic Research (NBER), a group that tracks the change in business cycles, looks at other factors besides GDP to determine when the country is in a recession. These factors include: a decline in real income, a rise in unemployment, and a decline in consumer spending.
Recessions are a natural component of the business cycle, and hard as they may try, policymakers can’t necessarily avoid recessions. As one financial expert noted, it’s not shocking that recessions occur, but what does catch people by surprise is “usually the timing, the cause, and the depth and duration of them.”
There are many factors that force the economy into a recession. First, an economic shock, or an unpredictable event that causes widespread economic disruption, can slip the country into a recession. Think a terrorist attack or the coronavirus pandemic.
Second, a loss in consumer confidence, or when the public doesn’t have faith in their country’s economy, can also lead to a recession. When consumers lose faith, they stop spending, which causes the economy to contract.
Third, high interest rates can spur the economy into a recession. When the Federal Reserve raises interest rates, it’s more expensive for Americans to borrow money—which means they hold off on big purchases like homes or cars. Again, when Americans aren’t spending money, the economy slows.
According to the National Bureau of Economic Research, the average recession lasts 11 months.
There have been 11 recessions since 1948—an average of one recession every six years.
Three notable recessions include:
Typically, unemployment rises during recessions, so more Americans would find themselves without work. The Great Recession in 2007, for example, led to widespread unemployment, with one in five employees losing their job.
Inflation would also remain high during a potential upcoming recession—making it hard for American families to afford basic goods such as groceries, gas, electricity, and rent. Housing prices may also decline. However, every recession is different, so it’s not guaranteed that drop will occur.
Recessions force most Americans to take a good look at their budgets and finances and cut back on spending. Many Americans will hold off on making big purchases.
A depression is essentially a prolonged recession. While recessions typically last a few months, depressions last a few years. The Great Depression, for example, lasted 10 years, from 1929 to 1939. Depressions also cause much more damage to the economy than recessions.
Just as recessions impact the finances of Americans and their families, they also affect states and their economies. States with lower unemployment rates, more government reserves or, “rainy day funds,” and a good debt-to-income ratio are more likely to survive a recession. According to Moody’s Analytics, Wyoming, Alaska, West Virginia, and Oregon are best prepared for an upcoming recession in 2022 or 2023.
What Is A Recession? How Economists Define Periods Of Economic Downturn (Personal Finance)
What Is A Recession? (Forbes Advisor)
What is a Recession, and When is the Next One Going to Begin? (The New York Times)
Guide to Economic Recession (Guide to Economic Recession)
How To Recession-Proof Your Life (The Washington Post)
