What is a Recession?

Question: What is a Recession?

Answer:

Most of us have an intuitive idea of what a recession entails - job losses, plant closures and tough times for families. But what exactly is a recession? There are a few similar, but not identical definitions. To learn what economists mean by a recession, see:

  • Recession? Depression? What's the difference?

Do We Have to Have Recessions?

Recessions are part of what is known as the business cycle.
The occasional recession appears to be unavoidable, but there is some debate on whether or not recessions are good for the economy. Learn more about the business cycle and whether or not recessions are good for the economy here:
  • What is the Business Cycle?
  • Are recessions good for the economy?

What Causes Recessions?

There are a number of theories on what causes recessions. Some observers believe each recession has a unique cause, whereas others believe recessions generally have a single cause, such as bad investments (malinvestment) by firms. It is occasionally heard that recessions and depressions, such as the Great Depression, are caused by stock market crashes. Others believe that globalization has changed the the nature of the business cycle. To learn more, see:
  • Do Changes in Stock Prices Cause Recessions?
  • Globalization, Unemployment and Recessions. What is the Link?

How Do We Know If We're Going Into Recession?

We need to pay attention to the economic indicators, particularly leading economic indicators such as stock market returns and the level of business inventories.
More information between economic indicators and their relationship to recessions and the business cycle can be found here:
  • A Beginner's Guide to Economic Indicators

How Do Recessions Impact Politics?

Incumbents are more likely to get re-elected during a period of prosperity rather than in a recession.
Because of that, it is not surprising to see governments try to quickly improve the economy - particularly during an election year:

How Do Depressions Differ Than Recessions?

The general intuition that a depression is like a recession "but much worse" is correct. As with recessions, the exact definition of a depression can differ depending on the source:
  • Recession? Depression? What's the difference?
  • A Student's Guide to the Great Depression