The Lazy Economist: What is a recession?

Part one of a three-part series on the ups and downs of economic growth

Recessions occur when the economy starts to shrink due to a few different factors. 
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Fall is here. The air is chilly, the trees are dropping their leaves, and things are cooling down as we prepare for winter—just like the economy during a recession. With this in mind, the next few editions of The Lazy Economist are going to be about recessions.

You might have heard on the news that a recession is due any day now. Whether you believe it—or whether you know what a recession is at all—we’ll kick off this series by talking about how a recession could impact you.

At the most basic level, a recession occurs when the economy stops growing and starts to shrink. When the economy is growing, companies are generating new value, profits are up, and unemployment is low because companies are hiring more people. Conversely, when the economy shrinks, profits are down, and companies are laying people off.

The textbook definition of recession is a period of at least six months where the economy shrinks. However, there are some organizations, like the National Bureau of Economic Research in the United States, that define it simply as a widespread and significant decrease in economic activity that lasts at least several months.

Regardless, recessions are typically seen as a bad thing that make life harder for people.

There are several things that can trigger a recession. Customers can start spending less because they have all the products they want, so business slows down and companies manufacture fewer products and lay off their employees. This causes those newly unemployed people to consume less and further shrink the economy.

Otherwise, the price of a key input, such as oil, could go up and make everything else more expensive. This causes people to consume less and triggers a slowdown. A trade war could also make things more expensive and thereby reduce consumption.

These are just a few examples, but you get the idea.

One of the biggest impacts of a recession on everyday people is employment. A recession can make it very difficult to find a job. They also put existing jobs at risk as companies lay people off.

Because recessions can take such a toll on citizens, governments will sometimes stimulate the economy by cutting taxes or increasing spending in an attempt to re-start economic growth.

Recessions are also sneaky—they’re notoriously hard to predict. Even though there are some pretty reliable indicators, no one can be certain when the next recession will hit.

We will discuss some of those indicators in another Lazy Economist, but for now, you’ve got a basic sense of what a recession is and how it impacts people. 

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