A decrease in consumer and business confidence is what triggers an economic recession. Demand decreases as confidence does too. A recession occurs when continued economic expansion reaches its peak, reverses direction, and continues to shrink over time.
What Is A Recession?
A considerable decrease in overall economic activity in a particular area is referred to as a recession. The GDP, together with monthly signs like an increase in unemployment, had generally been viewed as two consecutive quarters of the economic downturn. The two consecutive quarters of real GDP fall are no longer how recessions are defined, according to the National Bureau of Economic Research (NBER), which officially proclaims them. According to the NBER, a recession is characterized by a widespread, severe fall in economic activity that lasts for more than a few months and is often reflected in real GDP, real income, employment, industrial production, and wholesale-retail sales.
The business cycle typically includes recessions, notwithstanding how unpleasant they are. Business failures in large numbers, frequent bank failures, slow or negative production growth, and high unemployment are the hallmarks of recessions. Although very short-lived, the economic suffering brought on by recessions may drastically change an economy. This can happen due to structural economic changes brought on by the failure and displacement of vulnerable outdated businesses, industries, or technological advancements.
What Causes Recession?
Several economic theories try to explain why and how the economy could stop following its long-term growth and enter a brief recession. These ideas can be roughly classed as being based on psychological, financial, or actual economic factors, with some theories bridging these categories.
According to some economists, actual developments and structural changes in the sectors best explain why and when economic recessions occur. For instance, a geopolitical crisis-related abrupt, prolonged rise in oil prices would simultaneously increase costs across many businesses, or a game-changing new technology might quickly render whole industries obsolete, both of which would result in a generalized recession.
One instance of the kind of economic shock that might cause a recession is the emergence of the COVID-19 pandemic and the subsequent public health lock-downs of the economy in 2020. It’s also possible that other underlying economic tendencies are causing a recession and that a financial shock just causes the slump to reach its breaking point.
Recessions have been attributed to financial issues in specific ideas. These often concentrate on the overexpansion of credit and financial risk during the prosperous economic times before the recession, the contraction of money and credit at the start of recessions, or both. One such theory is monetarism, which attributes recessions to inadequate increases in the money supply.
Recession Depression
There have been 34 recessions in total in the US, starting with the first in 1854 and ending with the most recent in 2020. Five instances of this kind of recessionary economic growth have occurred since 1980. The worldwide recession that followed the 2008 financial crisis and the Great Depression of the 1930s are two well-known instances of recession depressions.
A severe and protracted recession is a depression. The number of products and services produced in the US fell by 33% during the Great Depression, the stock market lost 80% of its value, and the unemployment rate briefly reached 25%. Yet, there is no set definition of what constitutes depression.
The Great Recession
Since the Great Depression, the Great Recession was the greatest and deepest economic depression. Real estate bubbles and sophisticated investments known as derivatives were to blame.
Despite only lasting 18 months, the recession significantly influenced the decade that followed. 25% of the total wealth of US families was lost. The retirement funds of many workers with defined-contribution pension plans were lost. Even though a recession is declared to be over, that doesn’t mean the economy has recovered or that the impacted individuals have returned to their prior positions.
The Dot Com Recession
The fast expansion of commercial internet use led to a bubble in technology stocks, which led to the dot-com recession. A significant quantity of one-time purchases was also prompted by the Y2K problem: the worry that computers and software might malfunction because they used two-digit numbers to represent years.
Share prices increased as more people and institutions were interested in owning certain tech. But it couldn’t continue, like any bubble, especially when the events of 9/11 shocked the world. The economic stimulus from the Bush administration’s tax cuts and the Federal Reserve’s interest rate reductions was one factor in the brief period – only eight months.
Takeaways
- A decrease in consumer and business confidence is what triggers an economic recession.
- Recessions have been attributed to financial issues in certain ideas.
- There have been 34 recessions in total in the US, starting with the first in 1854 and ending with the most recent in 2020.
- The Great Recession was the greatest and deepest economic depression.
- The fast expansion of commercial internet use led to a bubble in technology stocks, which led to the dot-com recession.
