What Happens During an Economic Recession?

The National Bureau of Economic Research (NBER) defines economic recession as a significant decline in economic activity lasting more than a few months.

Other than Gross Domestic Product (GDP) growth, factors like current national unemployment rates as well as consumer confidence and their level of spending are taken into consideration when determining whether the economy is going through a recession.

In an economic recession, GDP growth is negative for a period of two quarters or more. In the beginning, positive growth in achieved in spite of several quarters slowing considerably. The first quarter of negative growth will be followed by a few quarters of positive growth, and then negative growth will return.

Unemployment levels rise as a result of many firms decreasing the number of staff as a part of their cost-cutting measures. The number of people looking for employment far exceeds the number of job opportunities. With fewer people left to contribute, the productivity in the economy is seriously affected.

During a recession, it's a normal tendency of people to save money. There is decline in the levels of spending by consumers due to the decline in their confidence levels. This decline in confidence level is triggered by financial or employment crisis.

As a result of reduced spending by the consumer, business firms are forced to reduce prices of the commodities to attract consumers. Such drastic measures very often lead to deflation. As the prices decrease, the spending capacity of consumer increases. This, in turn, improves the economy, with simultaneous increase in job opportunities.

During a recession, the government adopts expansionary macroeconomic policies like increasing money supply and decreasing taxation. In the US economy, the Federal government lowers the Federal Funds rate to revive the slowing economy.

While reviving the economy, the interest rates are reduced by the regulators in order to attract business and help people to borrow money at a reduced level. This decreases the value of the American dollar and attracts foreign investors who look forward to initiate business with the United States.

Corporate firms are able to increase productivity with this inflow of capital and expand their business simultaneously, creating more employment opportunities in a regressive phase.

Even the real estate industry is affected by recession. Due to implementation of fiscal conservatism, a fiscal policy advocating the reduction in government spending, people avoid dealing in real estate during recession. Those who have lost their jobs go to the extent of selling their homes to make up for financial instability.

With the increase in supply of properties during the period of low demand, real estate prices are slashed considerably. Recession makes the stock market fickle. During this financial crisis, people opt to sell their investments as the last resort. Thus, with many people selling their stocks at the same time, a sharp decline is triggered in the stock market.

The first and the foremost peril of recession is loss of jobs. As the companies take to cost cutting, thousands of individuals lose their jobs. It becomes further more difficult to find a new job in this regressive phase.

Even a single earning member of the family losing a job can lead to imbalance in household budget. A sharp fall in the stock market is triggered due to high exposure in equity, making the stock market volatile. Initial rise in the prices of commodities affects the consumer's capacity to spend.

The depth and seriousness of the ongoing recession is aptly highlighted by the fact that we have seen a prominent fall in private consumption in last 20 years. Taking this into consideration, it is wise to assume that recovery from this will definitely take some more time.