What Is an Economic Recession?

(Last Updated On: August 27, 2019)

What Is an Economic Recession?

What Is an Economic Recession?

If you’re living in America right now, you’re probably being inundated with news article after news article about an impending economic recession in the US. Many countries, like Germany, Italy, the UK, Brazil, Argentina, Singapore, South America, and Russia, are also experiencing economic contractions placing them at risk of recessions as well. So with economic recessions more relevant than ever, some of you may be wondering; what is an economic recession? 

Generally speaking, an economic recession is exactly what it sounds like when you pick the words apart. The economy recedes. There are some technicalities, though. For example, in the US a recession is defined in regards to GDP, the stock market, real income, production, retail, and the like. Typically it’s for a period of a few months. The National Bureau of Economic Research uses the phrasing: “a recession is a significant decline in economic activity across the economy.”

But more to the ins and outs, another example would be the UK’s definition; simply negative economic growth for two consecutive financial quarters. 

So put simply, a recession is when the economy has shown a pattern for stagnating to shrinking for extended periods of time. 

Recessions Can Have Shapes

Recessions are typified normally by shape. Though they’re named after letters, determined by how the GDP percentage change graph looks. 

  • V- Shaped
    • Relatively brief with sharp declines and recovery.
  • U-Shaped
    • Longer decline and GDP shrinkage with slower recovery.
  • W-Shaped
    • Decline with some growth before declining again (and then later recovery).
  • L-Shaped
    • A recession during which the economy does not return to its pre-recession state for a really long time–if it recovers at all.

Yield Curve Inversion

If you’ve been reading about what economists are calling America’s impending recession, you’re probably on high guard. Well that, and you’ve probably seen “yield curve inversion” thrown around as the prime indicator for a possible recession. 

It can be boiled down to how confident investors are in the economy. They will invest in long-term bonds opposed to short term ones when they are more confident that the economy will provide a better return on investment a long time from now, rather than in a short time. When that happens it causes a yield curve inversion; signaling a lack of confidence in the economy as is. The 2001, 1991, and 1981 US recessions were preceded by yield curve inversions. 

With respect to the US; there’s also corporate insiders selling a lot of their stock in light of the US-China trade war developments–which signals a lack of confidence in the stock market.

Related post: What Is a Trade War?

Other Recession Predictors

A lot of recession predictors are also, unsurprisingly, its consequences. Unemployment rate changes, high debt, and commodity prices hikes are all indicators of a recession. 

All of these are combined with marked increases in income inequality–something a recession likely will reinforce as the negative impacts are felt far more by those without a lot of funds put away.

What Does a Recession Mean for You?

If you’re an average American, you’re probably not wealthy enough to even begin getting involved with treasury bonds and the stock market in a very meaningful way. In light of the government shutdown that lasted into January 2019, it came out that almost 80% of US workers live paycheck to paycheck.

While it might not necessarily be true that 100% of the stocks lie in the hands of a few, it is safe to say that the vast majority of stock ownership goes to the well-off. So we would be forgiven if yield curve inversions and insider selling goes over our heads. Why wouldn’t it? It doesn’t directly affect most of us. Until a recession happens.

On the ground level, one can expect unemployment and layoff spikes as corporations move to save money. By taking away the primary income source from the people, retail sales will also drop as the people attempt to save what little money they have left. You’re going to see less corporate investment (or any investment, really) as well. Really, money just isn’t going to be changing hands as much, and many Americans on the ground level may end up in a really bad spot. 

Recessions can open the door for anti-competitive company mergers as well–upending and defeating the entire purpose of the purported “free market” more than it has already been undermined.

In regards to unemployment, its long term effects likely wont be seen for a long time after the recession, and normally recovers long after a recession has ended. 

Impending recessions inspire a lot of existential dread. Rightly so. Don’t worry, we have some kittens and ice cream here.

Comments

comments

Kyler
About Kyler 94 Articles
Kyler is a content writer at Sporcle. He currently spends most of his time hitting the university grind while drinking black coffee like water.