What’s a Recession Anyway?
Unless you’ve been living in a bunker for the last several months, you’ve likely caught the term “recession” thrown around on the news more than once. Hearing this word can trigger a range of reactions from mild anxiety to a full-blown stuffing-money-under-the-mattress panic.
For many people, though, part of their angst surrounding the state of the economy is the vast amount of unknown:
What is the exact definition of a recession? How is it different from depression? How long do recessions usually last? What causes a recession?
So many questions — but we’ve got answers! Here’s all you need to know about recessions, the current state of the U.S. economy, and what all of this means to you as a private consumer.
What is a recession?
A recession is a widespread economic decline in a designated region that lasts for several months or longer. In a recession, the gross domestic product (GDP), or the total value of all goods and services produced in the region, decreases for two consecutive quarters. A healthy economy is continually expanding, so a contracting GDP suggests that problems are brewing within the economy. In most recessions, the GDP growth will slow for several quarters before it turns negative.
What’s the difference between a recession and a depression?
A depression has criteria similar to that of a recession but is much more severe. For example, in both a recession and a depression the unemployment rate rises; however, during the Great Recession of 2008, the worst recession in U.S. history to date, unemployment peaked at 10%, while during the Great Depression, unemployment levels soared to 25%. Similarly, during the Great Recession, the GDP contracted by 4.2%, while during the Great Depression, it shrank by 30%.
Depressions also last a lot longer than recessions. The Great Depression officially lasted for four years but continued to impact the economy for more than a decade. In contrast, recessions generally last only 11 months, according to data from the National Bureau of Economic Research (NBER).
There have been 47 recessions in U.S. history, and a total of 13 recessions since the Great Depression. There has only been a single recorded depression in our country’s history.
What causes it?
A recession can be triggered by a variety of factors:
- A sudden economic shock causes severe financial damage.
- Consumers and businesses carry excessive debt, leading to debt defaults and bankruptcies.
- Asset bubbles, or when investors make irrational decisions, overbuy stocks, and then rush to sell, causing a market crash.
- Excessive inflation and rising interest rates, which trigger a decline in economic activity.
- Excessive deflation, which sparks a decrease in wages, further depresses prices.
- Technological changes, including outsourcing jobs to machines or other technological breakthroughs, alter the way entire industries operate.
How does this affect me?
A recession can impact the average consumer in multiple ways.
First, many struggle with sudden unemployment or face joblessness.
Second, economic uncertainty can trigger changes in interest rates.
Finally, investments in stocks, bonds, and real estate may lose value during a recession.
The good news is there’s no need to start stuffing money under your mattress. As a member of United Texas Credit Union, your funds are always safe. Your money is privately insured up to $250,000 (with no limit on the number of accounts) by American Share Insurance. If you are experiencing financial difficulties of any kind, feel free to contact us to see how we can help.
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Sources:
https://www.forbes.com/advisor/investing/what-is-a-recession/
https://www.investopedia.com/terms/g/gdp.asp
https://www.bbc.com/news/av/53736958
https://www.cnbc.com/2020/06/09/us-officially-in-a-recession-but-its-different-than-2008.html
https://www.nber.org/cycles/jan08bcdc_memo.html
https://www.cnn.com/2020/07/30/economy/us-economy-2020-second-quarter/index.html