What Is a Recession?

What Is a Recession?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A recession is a significant decline in economic activity spread across months or years. It’s a period where the scope and scale of economic phenomena generally shrink. You might notice companies laying off employees to cut costs, decrease in stocks or real estate values, and general uncertainty about the future. Recessions are part of the natural cycle of an economy, influenced by numerous factors such as inflation rates, consumer confidence, central bank policies, or unexpected events like pandemics.

Related Questions

1. What causes a recession?

A recession can be caused by several things, including high interest rates, increased inflation, reduced consumer confidence, or reduced real wage rates. They are often a result of a combination of these aspects, leading to a significant decline in economic activity.

2. How long does a recession typically last?

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Recessions usually last about 11 months according to the National Bureau of Economic Research. However, they can significantly vary. The Great Recession of 2007-2009 lasted 18 months, whereas the 2020 recession caused by the Covid-19 pandemic lasted only two months.

3. How does a recession affect businesses?

During a recession, businesses might see their profits drop due to decreased consumer spending. They might need to implement cost-cutting measures, such as layoffs or budget reductions. Some businesses might also face bankruptcy or closure.

4. How does a recession affect job prospects?

Job prospects usually become dimmer during a recession. There can be more competition for fewer open positions, more part-time work, or lower-paying jobs. Employees are less likely to quit their jobs, making openings less frequent.

5. How can one prepare for a recession?

Preparing for a recession includes measures such as saving an emergency fund, reducing debt, diversifying income sources, keeping your job skills up to date, and cutting non-essential expenses.