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What is a Recession?

Simply put a recession occurs when there is a reduction in economic activity. 

Technically speaking a recession is “a period that experiences a significant GDP decline over months that also witnesses a decrease in personal income, employment, retail sales, and industrial production”. The National Bureau of Economic Research (NBER) places the average recession at 10 months if you only look as far back as the post-WWII period.

Causes of Recessions

  • Inflation-Triggered Recessions: When demand outpaces supply and inflation rises, effectively overheating the economy. High interest rates, stagnant wages, and rising unemployment can also lead to recession.
  • Recessions Caused by Economic Shock: A recession can also be triggered by an unexpected, one-time event that effectively rattles the economy. A recent example is the COVID-19 pandemic in 2020, which sent shockwaves around the world as economies shut down in an attempt to curb disease transmission.
  • Recessions Caused by Asset Bubbles: In the stock market, a bubble is formed when stock prices rapidly rise out of proportion to their fundamental value. The inflated asset is met with panicked selling, and the market can crash as a result, triggering a recession.

Effects of a Recession

When the economy falters, people can lose their jobs, manufacturing output declines, prices fall, and may businesses fold. People feel the pinch in their pockets and spend less. There can even be psychological and emotional side effects to a recession.  

Solutions to an Economic Recession

A recession (or depression) ends when GDP returns to (or near) its trend line.

Some methods a government may use to accomplish this are:

  • Reduce Taxes
  • Increase in Government Spending
  • Reduce Interest Rates
  • Remove Regulations

There’s no way to predict for certain when we’ll see the next recession, but there are ways to prepare for it.

  • Focus on budgeting and building an emergency fund
  • Prioritize paying off high-interest debt
  • Invest wisely
  • Find additional revenue streams


Sources and enhanced by Credit Union of Denver

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