What is a recession?
Photo by: megananne
The word recession seems to be everywhere these days. You hear it on the nightly news, read about it in the daily paper, politicians discuss it constantly and it’s the topic at the “water cooler” in the office. As I write this article, the word recession is on the main pages for CNN.com, MSN Money, USA Today Money, Google News…well you get the picture. Everyone is talking about it, writing about it, and worrying about it.
But what is a recession anyway? I’ll admit, I didn’t know until I did the research for this article. I had a basic idea and knew it wasn’t generally considered a good thing, but if someone asked me to explain a recession in detail, I wouldn’t have been able to. Given I blog on personal finance, I figured this is something I should know and understand. I wrote this article thinking some of you may not know as well. So, let me share with you what I learned. It’s really pretty simple at a high level.
What is a recession?
A recession is a significant decline economic activity, lasting more than a few months (many believe 2 months), and generally measured using real gross domestic product (GDP). Real GDP measures the size of a the U.S. economy. Put simply, GDP is the total value in dollars of all goods and services produced within the boundaries of a country in a given period. I use this definition in the context of the U.S. only, as while at a high level the definitions of a recession are common from country to country, the details in how the determination is made vary greatly.
Recessions can be associated with many different things in our economy, including:
- Sharply rising prices (inflation)
- Falling prices (deflation)
- Declines of employment
- Declines of investing
- Declines of overall corporate profits
Severe or long running recessions are called depressions. There is no particular agreement on how “long running” is defined nor is the distinction between a depression and a recession really definitive. A severe depression, or significantly high inflation (commonly called hyper inflation) is called an economic collapse. The text book example of this is the 1929 stock market crash here in the U.S. A decline in GDP over more than 10% is generally considered a depression.
Is the U.S. in a recession?
By definition no, as we haven’t seen a quarter with a reduction in GDP. GDP for first quarter of 2008 is .6%. GDP for 4th quarter 2007 was also .6%. While we may be experiencing very slow to stagnant growth, our economy overall hasn’t declined.
Are we headed for a recession here in the U.S.? Possibly. Many financial analysts believe the economic stimulus package will keep the GDP from declining. Of course just as many think it won’t help at all.
With overall product prices skyrocketing, gas prices rising, housing and stock markets on the decline, we definitely seem to be heading in the direction of a recession. Most economists believe the next quarter will be the deciding factor on whether we head into recession or make a positive turn towards economic growth.
Here are some articles from my blogroll I think you’ll enjoy as well:
- Wall Street Journal Is Advocating Stockpiling Food – Is This A Recession Or Not? – My Two Dollars
- Please Stop Calling It A Recession from Mashable
- Eight Questions About the Current State of the Economy – And How It Affects You from The Simple Dollar
- Recessions and the State of Our Economy: A Visual Primer from The Digerati Life
- A Recession Could Do America Some Good from One Caveman’s Financial Journey
What are your thoughts on the possible recession? Do you think this is good or bad overall for our economy? Did you directly experience the recession in the early 80′s? How did it impact you? What did you do to get through? Are you doing anything to prepare for a possible recession? If so what?