What is a Recession?

Published by Thomas Herold in Economics

'Recession' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A recession is literally defined as the declining of the nation’s GDP, or Gross Domestic Product, by a smaller amount than ten percent. This drop in GDP has to occur over greater than a single consecutive quarter in a given year. Gross domestic product stands for the total of all goods and services that a country produces, or the actual total of all business, private, and government spending on the categories of investment, labor, services, and goods.

The terms recession and depression are typically confused and sometimes used interchangeably. They are quite different from each other. Recessions are typically less severe than are depressions. Recessions are generally corrected in significantly less time and with less economic pain for individuals. Depressions furthermore involve drops in GDP of greater than ten percent.

There is no universal consensus on what makes a recession within an economy. Most economists agree on a few different factors that are commonly involved in causing such recessions. Prices might decrease substantially, or alternatively they could go up substantially. The decrease in prices shows that people are spending smaller amounts of money, and this will cause the Gross Domestic Product to go down. Conversely, higher prices can diminish the amounts of public and private spending, similarly causing the Gross Domestic Product to decrease.

As much as governments, individuals, and businesses hate recessions, many economists feel that they are normal for economies to go through, particularly mild ones. They claim that such economic pull backs are a built in part of society and economics. Prices go up and down, and spending and the amount of consumption similarly decreases and increases over time as well. Still, natural decreases in spending are not sufficient to provoke a recession into occurring. Some other factor changes suddenly and leads to sharp spikes or drops in real prices.

For example, the early 2000’s recession came about as a result of the dot com industry suddenly and precipitously decreasing in activity. One day, the demand that they had anticipated turned out to be far less than expected. This created enormous failures of companies and significant layoffs that led to production decreases and finally spending cuts. This dot com drop created a shock effect on the gross domestic product, leading to a significant fall in production and output as spending dropped.

The recession had ended by 2003, yet the consequences of it turned out to be dramatic and can still be felt. High paying jobs suddenly disappeared, only to be outsourced to foreign countries. These jobs will likely never return to the United States. Still, as the Gross Domestic Product began growing again, the recession was deemed to have ended. This does not change the fact that numerous individuals still feel the impact of it in their own personal lives.

Similarly, the Great Recession that you saw stem from the financial collapse of 2007-2010 came about as a sudden seizure in the banking industry and credit markets. It has led to the highest levels of real unemployment since the Great Depression, reaching nearly twenty percent when measured by the formula that had been used until President Bill Clinton changed it. Even though this recession has been called over, the unemployment levels have not declined meaningfully. This means that for several more years at least, a great amount of economic pain and hardship will continue to be felt by those countless millions who have lost their jobs in the recession.

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The term 'Recession' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.