Wealth buildingWhat is a Recession?
According to the National Bureau of Economic Research, the United States has been in a recession since December of 2007. We are currently undergoing one of the most severe recessions in United States history. Recessions can be times of great fear and widespread panic. A recession is a normal stage of the business cycle. The business cycle is defined as recurring fluctuations in economic activity. The business cycle is comprised of four stages:
1. Expansion- time of economic prosperity and growth, rise in GDP, low unemployment
2. Peak- highest point of economic activity, highest wages, lowest unemployment
3. Recession -Â slowdown in economic activity, decline in productivity, rising unemployment
4. Trough - lowest point of economic activity, highest levels of unemployment, lowest wages
So, what is a recession anyway and why did it take so long to identify? A recession is two or more consecutive quarters of decline in gross domestic product(GDP). GDP is the total value of all goods and services produced within a country. Since it takes at least 2 quarters to officially identify a recession, the earliest that economists could have identified the current recession was in the 3rd quarter of 2008.
So, what exactly happens in a recession? A recession is a contraction in the business cycle. The supply of goods and services exceeds the demand for goods and services. The decrease in demand for goods leads to layoffs of employees. Increased employee layoffs lead to higher unemployment levels. Higher unemployment causes rising consumer bankruptcies and foreclosures. Laid off employees purchase fewer goods. Money becomes tighter as consumers tighten their belts and spend less. Less efficient companies that are laden with debt are driven out of business. Finally the bankruptcies of businesses leads to a decrease in the supply of goods available and demand begins to slowly recover.
So, how long can a recession last? There is no definitive time limit on a recession. A recession can be as short as a 6 month time period or last for years. A recession that is very severe and long lasting can be referred to as a depression.
So, can any good come out of a recession? Yes. Recessions do have some benefits. They eliminate inefficient suppliers, lower prices, reduce inventory and encourage competition.