What Is a Recession? Examples, Impact, Benefits
Do You Know Its Five Warning Signs?
A recession is when the economy declines significantly for at least six months. That means there's a drop in the following five economic indicators: real GDP, income, employment, manufacturing and retail sales.
People often say a recession is when the GDP growth rate is negative for two consecutive quarters or more. But a recession can quietly begin before the quarterly gross domestic product reports are out.
That's why the National Bureau of Economic Research measures the other four factors. That data comes out monthly. When these economic indicators decline, so will GDP.
A recession is usually underway when there are several quarters of slowing but still positive growth. Often a quarter of negative growth will occur, followed by positive growth for several quarters, and then another quarter of negative growth.
The first sign of an impending recession occurs in one of the leading economic indicators such as manufacturing jobs. Manufacturers receive large orders months in advance. That's measured by the durable goods order report. If that declines over time, so will factory jobs. When manufacturers stop hiring, it means other sectors of the economy will slow.
A fall-off in consumer demand is normally the culprit behind slowing growth. As sales drop off, businesses stop expanding. Soon afterward they stop hiring new workers.
By this time, the recession is usually underway. For more, see What Causes a Recession?
A recession is destructive. It creates wide-spread unemployment, sometimes as high as 10 percent. That's when it affects most people. As the unemployment rate rises, consumer purchases fall off even more. Businesses go bankrupt.
In many recessions, people lose their homes when they can't afford the mortgage payments. Young people can't get a good job after school. That throws off their entire career. Even if the recession is short (nine to 18 months), its impact can be long-lasting.
The recession quietly started in the first quarter of 2008. The economy contracted slightly, only 0.7 percent, rebounding in the second quarter to 0.5 percent. The economy lost 16,000 jobs in January 2008, the first time since 2003. That's another sign the recession was already underway.
Unlike most recessions, demand for housing slowed down first. That's why most experts thought it was just the end of the housing bubble, not the start of a new recession. Here are the facts:
- GDP slowed in the fourth quarter.
- Businesses orders declined .06 percent compared to the prior year.
- Employment fell, and unemployment rose.
- Housing prices fell 10 percent.
Another good example was the stock market crash and subsequent economic downturn in 2000. That was not a recession according to the textbook, because GDP growth was negative in Q3 2000, Q1 2001, and Q3 2001, none of which were consecutive.
But anyone who lived through the 2001 recession knows that it felt like a recession during all that time. And in fact, GDP growth did not return to 3 percent until Q3 2003.
Recession Versus Depression
A recession can become a depression if it lasts long enough. In a recession, the economy contracts for two or more quarters. A depression will last several years. In a recession, unemployment can rise to 10 percent. In a depression, the unemployment rate will be 25 percent. For more, see Recessions vs. Depressions.
Are There Any Benefits to a Recession?
The only good thing about a recession is that it cures inflation. The Federal Reserve must always balance between slowing the economy enough to prevent inflation without triggering a recession. Usually, the Fed does this without the help of fiscal policy.
Politicians, who control the Federal budget, generally try to stimulate the economy as much as possible through lowering taxes, spending on social programs and ignoring the budget deficit. That's how the U.S. debt grew to $10.5 trillion before even a penny was spent on the Economic Stimulus Package.
- What Are the Components of GDP?
- What Is the Difference Between GDP and Growth Rate?
- What Is the Ideal Growth Rate?