Recession is a decline in overall business activity. During a nationwide recession, a country suffers a drop in buying, selling, and production, and a rise in unemployment. A recession may also hit an industry or a region. Recessions hurt countless people, especially the workers who lose jobs.
Recessions, also known as contractions, are part of the business cycle, a recurring rise and fall in economic activity. A recession is often defined as a decline in a nation’s gross domestic product (GDP)—a measure of a nation’s output of goods and services—for six consecutive months. However, the National Bureau of Economic Research, the organization that decides the beginning and ending dates of a recession in the United States, uses a variety of measures of economic activity besides the GDP to determine such dates. Generally, the length of recessions is considerably shorter than the length of periods of economic expansion (increases in economic activity). Many recessions last less than a year. A deep, long-lasting recession is called a depression.
Recession and inflation.
Because demand for goods and services is weak during nationwide recessions, inflation (an increase in prices throughout a nation’s economy) is usually low. In some instances, a recession can cause prices in an economy to fall. Prior to World War II (1939-1945), recessions were usually accompanied by deflation—that is, declines in the overall price level. Since World War II, recessions have usually resulted in disinflation, a reduction in the inflation rate. Some recessions, however—such as those that took place in the United States during the 1970’s—were accompanied by an increase in inflation. Such recessions are known as periods of stagflation.
Causes of recession.
Most recessions occur because the total amount of spending in the economy drops. For example, if sales rise more slowly than usual, businesses may reduce their orders for new goods. The manufacturers that supply the goods cut back on production. They need fewer workers, and so layoffs and unemployment increase. Workers have less money to spend, which further decreases the demand for goods. As this pattern spreads, a recession begins.
Government action may trigger the drop in spending. For example, cuts in government spending could reduce the nation’s total spending enough to start a recession. Reduced spending also may result if the government conducts a tight money policy, which makes bank loans more expensive and harder to obtain.
People’s expectations also play a role in the decline of economic activity. If manufacturers or consumers believe conditions will worsen, they may cut back on their buying. By doing so, they can bring on the slump they were trying to avoid.
Fighting recession.
A government tries to end a recession chiefly by means of its fiscal policy and monetary policy. Fiscal policy deals with a government’s spending and taxing. Monetary policy refers to how a government influences such economic factors as interest rates and the availability of money and loans. To halt a recession, a government may boost its own spending or reduce income taxes. It may also implement policies that reduce interest rates so that loans are less expensive and easier to obtain. These actions attempt to give people more money to spend, in the hope that such an increase will also raise demand for goods and services and create more jobs.
Many nations also have built-in stabilizers that work to stimulate the economy without any special government action. One such stabilizer in the United States is unemployment insurance, which provides benefit payments from the government for workers who lose their jobs.
