What is a Recession? A recession is when the economy goes through a tough time. It’s like a big, long-lasting economic slump. People don’t have as much money to spend, businesses might not make as many things, and jobs can be hard to find.
Some smart folks who study the economy, called economists, keep an eye on things like how much stuff is made, how many people have jobs, and how much money people are spending. They check if these things are going down for a while, like for several months.
Before, people thought a recession happened if the economy shrank (got smaller) for six months in a row. But now, economists know it’s a bit more complicated. They look at other stuff too, not just the economy getting smaller. Sometimes, a recession can happen even if the economy doesn’t shrink for six months straight.
But, it’s kind of tricky. There’s no exact rulebook that says, “This is a recession.” Economists look at a bunch of things and make a judgment. It’s like figuring out a puzzle after it’s done – they can’t always say for sure if a recession is happening right when it starts.
Remember, a recession is when the economy is like a roller coaster going down for a while, and it can be tough for everyone.
| Important Things to Know |
|---|
| 🌧️ What is a Recession? |
| A recession is an economic slump that lasts a while. People have less money, businesses make fewer things, and jobs are hard to find. |
| 🔍 How is it Figured Out? |
| Economists check if things like stuff being made, jobs, and spending money go down for a few months. They look at different signs, not just the economy getting smaller. |
| ⏰ How Long Can It Last? |
| Sometimes, a recession is short and lasts a few months. But things might not get better for years. |
| 🔄 Slow Recovery |
| Even when the economy gets better, jobs might take a while to come back. So, it might still feel like a recession. |
| 🌍 Preventing Recessions |
| Countries try different things, like changing money stuff or making rules about government spending, to stop or prevent recessions. |
What you'll learn:
➤ What to know about recessions
Throughout history, economies have mostly been growing, with slowdowns being rare. However, recessions still happen quite often. Between 1960 and 2007, there were 122 recessions in 21 advanced economies, which means they popped up about 10% of the time, says the International Monetary Fund (IMF).
Recently, though, recessions have become less common and shorter in duration.
Recessions create a cycle of problems. When the economy shrinks, people might spend less. This can lead companies to lay off workers, which makes people spend even less. It’s like a chain reaction that keeps getting worse.
Also, during recessions, the stock market often goes down a lot, making people feel like they’ve lost money. This can make them spend even less because they don’t feel as rich.
After the big depression a long time ago, governments worldwide started doing things to stop small recessions from becoming big disasters. Some of these things happen automatically, like giving money to people who lose their jobs. Others need specific actions, like making it cheaper to borrow money so companies will invest.
Recessions are like economic hiccups, and governments have learned ways to help smooth them out and make them less scary.
➤ Recessions by duration
When the economy is doing well, we call it an economic expansion. This starts at the bottom of a business cycle, the lowest point. It keeps going until the peak, which is the highest point. After that, the economy starts to shrink, and we call it an economic recession.
| From | To | Months | |
|---|---|---|---|
| 1 | Jun, 2009 | Feb, 2020 | 129 📅 |
| 2 | Mar, 1991 | Mar, 2001 | 120 📅 |
| 3 | Feb, 1961 | Dec, 1969 | 106 📅 |
| 4 | Nov, 1982 | Jul, 1990 | 92 📅 |
| 5 | Nov, 2001 | Dec, 2007 | 73 📅 |
| 6 | Mar, 1975 | Jan, 1980 | 58 📅 |
| 7 | Oct, 1949 | Jul, 1953 | 45 📅 |
| 8 | May, 1954 | Aug, 1957 | 39 📅 |
| 9 | Oct, 1945 | Nov, 1948 | 37 📅 |
| 10 | Nov, 1970 | Nov, 1973 | 36 📅 |
| 11 | Apr, 1958 | Apr, 1960 | 24 📅 |
| 12 | Jul, 1980 | Jul, 1981 | 12 📅 |
Recessions often become unmistakable only after they’re finished. Investors, economists, and employees might all see recessions differently, especially when they’re at their worst.
Stock markets usually drop before a recession arrives. So, investors might think a recession has started when they see their investments lose value and companies make less money. This can happen even if other signs of a recession, like how much people spend and how many people don’t have jobs, still look okay.
On the other hand, even after the economy starts getting better, lots of people might still not have jobs. This can make it feel like a recession is going on for many months or even years after things have started improving.
➤ Predictions of a recession
While there’s no single perfect way to predict a recession, there’s something that often happens before each of the 10 U.S. recessions since 1955: something called an inverted yield curve. But not every time this happens means there will be a recession that follows.
When things are normal, short-term money usually makes less interest than long-term money. This is because money you lend for a longer time has more risk. For example, a 10-year loan gives more interest than a 2-year loan because the lender might worry that future things like prices going up or interest rates getting higher could make the loan worth less. So, over time, the interest goes up – that’s called an upward yield curve.
But if the interest on long loans goes down and short loans go up, that’s called an inverted yield curve. This can sometimes mean a recession might be on the way. When interest rates for short-term stuff rise too much, the economy might slow down and go into a recession. The reason long-term loan interest goes lower than short-term loan interest is because traders think the economy will slow down in the near future, so they’re expecting interest rates to drop.
Investors also look at different signs that usually show up before a recession. These include things like the ISM Purchasing Managers Index, the Conference Board Leading Economic Index, and the OECD Composite Leading Indicator. These signs give hints about how the economy might do in the future.
➤ Causes of a recession
There are many ideas about why economies go into recessions. These ideas can be grouped into categories like economic, financial, and psychological factors, or sometimes a mix of these.
Some experts think changes in the economy itself are a big deal. Like when how industries work changes a lot, it can lead to a recession. For instance, if the price of oil shoots up and stays up, everything gets more expensive, and that can push the economy into a recession.
Other ideas focus on money stuff causing recessions. These ideas look at things like borrowing too much money when times are good, and then when things slow down, there’s not enough money to go around. Monetarism is one of these ideas – it says recessions happen when there isn’t enough money being used.
So, there are different ways people think about what causes recessions, and it’s often a mix of different things coming together.
➤ Consumer debt still grows
The total amount of money that consumers owe, shown by age group in trillions. Recessions are marked out.
Some ideas point to how people’s feelings can cause recessions. Like when everyone gets really excited during good times and then super sad when things go bad, that can lead to recessions sticking around. Keynesian economics is one of these ideas – it looks at how people’s moods and the economy’s health can make recessions worse and last longer.
Another idea is called the Minsky Moment, named after a smart economist, Hyman Minsky. This idea brings together both feelings and money stuff. It says that when everyone is super positive and investing a lot, it might lead to risky decisions that can’t last forever. It’s like a happy bubble that pops eventually.
➤ Recessions & depressions history
In the history of the United States, there have been 34 times when the economy slowed down a lot (recessions) since 1854. But only five of these happened after 1980. The worst slowdowns since the big Depression in the past happened after the big financial crisis in 2008 and the two tough times in the early 1980s.
Normal recessions can make the country’s money-making (GDP) go down by about 2%. But really bad ones can set the country back by as much as 5%, says the IMF. A depression is like an extra deep and long-lasting recession, but there’s no one way everyone agrees on to say when it’s a depression.
During the Great Depression, the economy in the U.S. got 33% smaller, the value of stocks went down by 80%, and a lot of people – 25% – didn’t have jobs. In the 1937-38 recession, the value of things the country makes and sells went down by 10%, and 20% of people were out of work.
➤ Recent Recessions
The COVID-19 pandemic in 2020 and the measures taken to control it caused a big shock to the economy, leading to a recession. The pandemic made everything go down a lot, and even though it only lasted for two months, it affected many parts of the economy. 10
In 2022, a lot of people who look at the economy were arguing about whether the U.S. was in a recession or not. Some signs said there was a recession, but others said there wasn’t. This debate has kept going into 2023.
A company called Raymond James said in a report in October 2022 that the U.S. wasn’t in a recession. They say that while the economy followed the rules for a recession by shrinking for two quarters, many other good signs show the economy is doing fine. They point out that even though the economy was smaller, more people were getting jobs. They also mention that even though people had less money, that was mostly because the extra money from COVID-19 help had stopped, but regular incomes were still going up. 11
Numbers from The Federal Reserve Bank of St Louis in late October 2022 also don’t show that the U.S. economy is in a recession. 12
On February 6, 2023, Janet Yellen, who’s in charge of the country’s money, said she wasn’t worried about a recession. She mentioned that when there are lots of jobs and not many people are out of work, that’s not how a recession looks. She talked about this on Good Morning America.
➤ Recessions FAQ
| 📋 Frequently Asked Questions |
|---|
| ❓ What Happens in a Recession? |
| In a recession, the economy gets weaker. Money-making, jobs, and spending by people all go down. Interest rates also usually go down as the central bank (like the U.S. Federal Reserve Bank) tries to help the economy. The government spends more on things like unemployment help because less money comes from taxes. |
| ❓ When Was the Last Recession? |
| The most recent U.S. recession happened in 2020 when the COVID-19 pandemic started. According to NBER, it lasted only two months, ending in April 2020. Even though it was short, it was a big recession. |
| ❓ How Long Do Recessions Last? |
| On average, U.S. recessions since 1857 went on for about 17 months. But the six recessions since 1980 were shorter, lasting around 10 months. |
➤ Final thoughts
A recession means the economy is going through a big, wide, and long-lasting slump. People often say a recession happens if the money the country makes (GDP) goes down for two quarters in a row, but there are more complex ways to figure it out.
When there’s a recession, a lot of people lose their jobs. This happens because companies don’t sell as much, so they don’t need as many workers. When people lose jobs, they can’t spend much, which makes things worse, and more people lose jobs.
Since a really bad time called the Great Depression, governments everywhere started doing things to stop normal recessions from getting worse. Some things are automatic, like giving money to people who lose jobs. Other things need specific plans, like making it cheaper to borrow money so companies will spend more.
In recent times, recessions have been happening less often and not lasting as long.
There’s no one perfect way to know if a recession is coming, but before each of the 10 recessions in the U.S. since 1955, there was something called an inverted yield curve. But sometimes the curve changed and there was no recession.
