Following all the recent talk of recessions in the US, you may have questions about what a recession is and what it would mean for the US. It feels like we have barely recovered from the recession of 2020, so it may seem frightening to think we might be headed for another one so soon. Here’s what you need to know about recessions.
Recession Definition
In order for an economic downturn to be officially classified as a recession, it must meet all three of the following criteria:
- Last for 6 months or longer (consecutively).
- Affect multiple industries.
- Impact the economy in a significant way.
This is very open to interpretation, so experts will often have differing opinions about recessions.
In the US, the National Bureau of Economic Research is seen as the expert on recessions. They are not officially appointed experts, but the public tends to look to them to determine and record recessions in the United States.
They have been known to add their own interpretation when classifying recessions. For example, the Covid-19 recession only lasted 2 consecutive months. However, the NBER determined that its significant and long-lasting (though intermittent) impact made it worthy of the title of recession.
Understanding Recessions
The economy expands and contracts in response to changes in consumer behavior, advancements, and current events. Recessions, while frightening, are normal.
Many governments around the world are quite adept at managing recessions, and they will often have a plan to stabilize the economy quickly once they notice the early warning signs of a recession. In some cases, they are able to avoid a recession altogether.
In recent years, there have been fewer recessions. In the last 30 years, the US has only had 4 recessions.
Recession Causes
There is no simple explanation for what causes a recession. A number of factors can trigger a recession, and they can be broadly organized into the following 3 categories:
- Economic – Economic changes include structural changes, technological innovation, and unexpected events. For example, a recession could be triggered by a sudden shortage in oil, obsolescence of jobs due to technological advancements, or a global health event. All of these would have a significant impact on the manufacture and sales of goods and, therefore, could trigger a recession.
- Financial – Financial changes often refer to changes in credit or money supply. The banks will often make it easier or harder to obtain credit in relation to economic growth and inflation. If they make it too easy or too hard to obtain credit, then that could trigger a recession.
- Psychological – Psychological changes are more commonly referred to as consumer confidence. When consumers are too optimistic or too pessimistic, it will affect the economy. For example, the stock market crash and the housing bubble burst were in part due to too much consumer confidence (there were a number of other factors at play.) When consumers are too pessimistic, they will usually reduce spending, which will trigger businesses to reduce costs and decrease production.
Examples of Recessions
In the past 30 years, the United States has experienced 4 recessions:
- The Covid-19 Recession: (February 2020 – April 2020) The Covid-19 recession is the shortest recession in US history. The NBER decided to include the recession because of its widespread and significant economic impact. During this recession, the unemployment rate rose to just under 15%, which is the highest unemployment rate in some time.
- The Great Recession: (December 2007 – June 2009) The Great Recession is the longest US recession since WWII. It was named after the Great Depression because of how long it lasted. The Great Recession was caused by the real estate bubble bursting, and countless Americans lost their homes in the crash.
- The Dot Com Recession: (March 2001 – November 2001) This recession is named because the technology bubble burst was a large factor behind the recession. However, there were contributing factors, like 9/11 and countless scandals due to shady financial practices.
- The Gulf War Recession: (July 1990 – March 1991) The First Gulf War impacted oil production, and the sudden, sharp increase in oil prices sent the US into a recession that lasted 8 months.
How Does a Recession Affect Me?
Your life is extremely likely to be impacted in some way by a recession. Here are some of the common ways a recession may affect you:
- Job loss
- Reduced wages or benefits
- Poor investment performance/reduced savings
- Foreclosures
- Bankruptcy
- Higher cost of living
- Difficulty finding a job
- Business closures
- Difficulty obtaining credit
A little bit of preparation can help mitigate the impact of a recession, but the effects of a recession are felt by everyone. Those with enough savings to get through a recession are less likely to feel extreme effects.
Exploring opportunities in recession-proof industries can be a strategic move to minimize personal financial risks during economic downturns.
FAQs About Recessions
Here are the answers to your burning questions about recessions.
1. How Long Do Recessions Last?
It varies significantly. The shortest recession in the last 30 years was just 2 months long. The longest recession in the last 30 years was 18 months long. On average, recent recessions have lasted 10 months. However, it is worth noting that you are likely to feel the effects of a recession long after the recession has been officially declared to have ended.
2. When Was the Last Recession?
The last recession in the US was in 2020, the Covid-19 recession. This recession didn’t only affect the US; the global nature of the pandemic meant that countries went into recession all around the world.
3. What Happens During a Recession?
The exact details of what happens during a recession will vary depending on the circumstances of the recession. However, you can expect to see:
- Increased unemployment
- Lower consumer spending (and lack of consumer confidence)
- Interest rate decreases
- Reduced manufacturing and production
- Increased cost of living
- Lower tax revenue
- Increase government spending in order to support social programs and stimulate the economy.
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