Recessions
By: Kristen Albertson
What Is a Recession?
A recession is a downturn in the economy that lasts for six to eighteen months and impacts many people. Recessions generally happen when the gross domestic product of an economy is negative for at least six months. This means that everything that is produced in the economy – goods, exports, and services – is significantly less than what was produced six months prior. Overall, recessions can have widespread negative impacts across the economy that last for a substantial period of time.
Why Do Recessions Happen?
Recessions can be triggered by many different factors including high inflation, high costs of borrowing money, and a decrease in overall spending. Inflation is caused by a decrease in the value of money over time, leading to a rise in the cost of goods and services and a decline in spending (consider reading our Inflation and Budgeting blog to learn more about inflation). High borrowing costs naturally result from high inflation, as the dollar does not have as much value during these times. Both of these factors can result in a decrease in spending, which depresses the overall economy even more. Other factors can also cause recessions, including wars and massive events that impact our country or the whole world.
How Recessions Affect Us
Recessions can affect us in many different ways. In a recession, consumers spend less on non-essential items such as new clothes or movie tickets, as well as larger purchases such as new homes or new vehicles. Since consumers spend less money, businesses lose money and may even close their doors, which means that some people will lose their jobs. This results in an even slower cash flow than when the recession began. At the personal level, a recession might look like job loss, difficulty borrowing money, difficulty paying for housing and other necessities, and decreased interest rates on savings.
What the Government Does in a Recession
There are several different ways for the government to respond to a recession. Since the amount of available money shrinks during a recession, the government’s job is to increase the availability of money in the economy. This may happen either through tax breaks or increased spending by the government via grants, community development, and new employment. The government may also improve borrowing and lending conditions for banks, businesses, and individual consumers to increase the flow of money in the economy.
Tips for Tough Times
There are several things you may want to do before and during an economic recession. Before a recession, work on saving up for an emergency fund in case you lose your job, and work on reducing your debt. During a recession, cut out any excess spending where you can to reduce any impact on your family. If you’ve lost your job, it may be difficult to get back on your feet, but there are social safety nets that can help you out. After you lose your job in a recession, you can seek unemployment insurance from the federal or state government. Local nonprofit organizations may also offer financial assistance during these times.
Conclusion
Recessions are natural downturns in the economy that can last for a while and impact many people. Going into a recession may seem scary at first, but just remember that everyone else is experiencing the same financial strain. To prepare for a recession, cut spending and debt and save where you can. During a recession, apply for unemployment insurance if you lose your job and pay attention to local opportunities for financial assistance. With the right know-how, you can prepare yourself and your family for the next recession.
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