What Defines a Recession?

Join the Money Funnies as they learn about the lifespan of recessions.

We are living through a recession currently, this time related to the 2020 Coronavirus pandemic.

But it isn’t the only recent recession. I personally graduated college at the start of the last recession, in 2008. (I’m guessing most people reading this remember that time well.)

The 2008/2009 recession was heavily associated with a housing bubble. That time the value of homes rose too high, then the bubble “broke” and many people were left with mortgages (debt) on homes that were greater than the value of the home.

Generally speaking, a recession is defined by a significant decline of economic activity for an extended period of time in many sectors of the economy across multiple locations.

A significant decline in economic activity means that people have stopped spending money on goods and services for a while, causing businesses to make less money. In turn, those businesses cut costs by buying less from other businesses and cutting jobs. So real income, the employment rate, industrial production and both wholesale and retail sales drop.

(To learn more about real income, click here to read about inflation.)

Many people lose their jobs, but a recession hurts everyone, even if you still have a job. The costs of goods usually rise, and there is more uncertainty about whether you will keep your job.

For it to be a recession, it generally has to affect many different industries across the country. So it’s not just that people aren’t spending as much on, say clothing, but pretty much all spending declines. Similarly, the issue doesn’t just occur in one location, say because of a natural disaster, but in different states and in rural, urban and suburban areas.

Often a recession is technically over before it feels like it’s over. The economic shrinking of the last recession lasted from the end of 2007 to late 2009, but the unemployment rate didn’t return to its pre-recession level until 2014.

After some time, the situation changes, either due to attempts to revive the economy or natural forces. But people start buying again and the economy grows. After years of economic growth, recession started again in late February 2020.

Recession is defined by economic decline. But even as the economy grows again, it takes time to return to the employment levels that existed before.

Data stated here was taken from the Federal Reserve Bank website.

Leave a Reply