Recession

by ABC

RecessionA recession is when your neighbor loses his job.

A depression is when you lose your job.

The technical definition of a recession is when the GDP (gross domestic product) of a country contracts for 2 or more consecutive quarters (3 month periods).  What this means is that general economic activity is decreasing.  Less people are working so the total salaries paid is less, less money is being spent on consumer goods such as cars and plasma televisions.

Does the stock market go down before or during a recession?

Sometimes – however, there have been many occasions where the stock market had a big drop and no recession occurred.  The stock market is not a good predictor of recessions.  The reality is that nobody can reliably predict when a recession will start or end.

How can the government get the economy growing?

There are many different ways for a government to try to avoid or get out of a recession:

  • Stimulate the economy with tax cuts.  This gives workers more money to spend.
  • Stimulus checks like we saw in 2008.
  • Increased government spending.   This could include infrastructure spending on roads.

All these measures are intended to increase economic activity and get the country’s economy into expansion mode again.

Why the delay in determining a recession?

When the government “officially” announces of a recession – it usually puts the start date several months in the past.  The reason for this delay is two-fold:

  1. The economy has to be contracting for 2 quarters.
  2. Some economic statistics can take time to report.

Recession vs. Depression

A depression is a more severe economy contraction.  One rule of thumb is that a depression occurs if the GDP contracts more than 10%.

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