What is a Recession?

Have you ever heard of the Great Depression? It was a very difficult period for the American economy. Many individuals were unable to secure employment. Some experienced financial losses in the stock market. Many even lost their homes.

Fortunately, America has not witnessed another economic depression since the 1930s. However, another occurrence in the economy is much more frequent. Similar to a depression, it can significantly impact people’s finances. What are we referring to? A recession, of course!

A recession occurs when the economy experiences a decline for a minimum of six months. How can we determine if the economy is declining? By examining several different factors. These factors include gross domestic product (GDP), income, employment, manufacturing, and retail sales.

GDP is the total value of a country’s goods and services. In most regions, GDP is measured annually. When GDP decreases, it is an indication that a recession is occurring. Naturally, a recession will also result in a decrease in employment. This means that fewer individuals will have jobs.

When people lose their jobs, they cease to earn income. Consequently, they also spend less money. This leads to a decrease in retail sales since fewer individuals are shopping. This, in turn, causes a decline in manufacturing due to reduced demand for new products.

When economists observe these patterns, they may conclude that a country is experiencing a recession. How often does a recession occur? The answer may surprise you! Recessions are more common than many people realize. Since the Great Depression, America has encountered 13 recessions.

Some economists attempt to predict when a recession will occur. To do so, they closely monitor trends in manufacturing and sales. If economists can issue a warning that a recession is imminent, people have time to prepare.

So what distinguishes a recession from a depression? Essentially, a depression is a prolonged recession. Typically, a depression lasts 3-4 years. The Great Depression persisted for 10 years.

Recessions also vary in duration. Some may last only a few months. The Great Recession of 2008 lasted 18 months. During that period, GDP declined and unemployment rose to 10 percent. Fortunately, the Great Recession concluded in October 2009.

Still curious about how concerned you should be about a recession? While they may sound intimidating, recessions are a normal part of the economy. The best way to prepare is to save money whenever possible and practice responsible spending. By adopting good financial habits, you will be prepared when the next recession occurs.

Try It Out

Are you ready to learn more? Find a friend or family member to assist you with these activities.

Activities to Explore

  • Expand your knowledge on gross domestic product. What exactly is it? Why is it important? Share your newfound knowledge with a friend or family member.
  • Imagine what it would be like to experience a recession firsthand. Create a short story where the country is going through a recession. What unfolds? Were you ready for it? How does your family navigate through this challenging time?
  • Delve deeper into healthy financial habits. What insights did you gain? What are some strategies to prepare for a recession? Discuss these ideas with a friend or family member.

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