Reasons why recessions occur

Popular Courses. Economics Macroeconomics. Part Of. Understanding Recessions. Effect on the Economy. Effect on Businesses. Investing During a Recession.

History of Recessions. Recession Terms A-F. Recession Terms G-Z. The Shapes of Recession Recovery. Key Takeaways A recession is in essence a rash of simultaneous failures of businesses and investment plans. Explaining why they happen, and why so many businesses can fail at once, has been a major focus of economic theory and research, with several competing explanations.

Financial, psychological, and real economic factors are at play in the causes and effects of recessions. Causes of the incipient recession in included the impact of COVID and the preceding decade of extreme monetary stimulus that left the economy vulnerable to economic shocks. Interest Rates Interest rates are a key linkage between the purely financial sector and the real economic preferences and decisions of businesses and consumers. Article Sources.

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Partner Links. Related Terms Recession Definition A recession is a significant decline in activity across the economy lasting longer than a few months.

What Is the Austrian School? The Austrian school is an economic school of thought that originated in Vienna during the late 19th century with the works of Carl Menger.

Economic Stimulus Economic stimulus refers to attempts by governments or government agencies to financially kickstart growth during a difficult economic period. Economic Cycle Definition The economic cycle is the ebb and flow of the economy between times of expansion and contraction. Below full employment equilibrium occurs when an economy's short-run real GDP is lower than that same economy's long-run potential real GDP. Investopedia is part of the Dotdash publishing family. Your Privacy Rights.

These phenomena are some of the main drivers of a recession:. The business cycle describes the way an economy alternates between periods of expansion and recessions. As an economic expansion begins, the economy sees healthy, sustainable growth. Over time, lenders make it easier and less expensive to borrow money, encouraging consumers and businesses to load up on debt.

Irrational exuberance starts to overtake asset prices. As the economic expansion ages, asset values rise more rapidly and debt loads become larger. At a certain point in the cycle, one of the phenomena from the list above derails the economic expansion. The shock bursts asset bubbles, crashes the stock market, and makes those large debt loads too expensive to maintain.

As a result, growth contracts and the economy enters recession. Recessions and depressions have similar causes, but the overall impact of a depression is much, much worse.

There are greater job losses, higher unemployment and steeper declines in GDP. Most of all, a depression lasts longer—years, not months—and it takes more time for the economy to recover. Economists do not have a set definition or fixed measurements to show what counts as a depression. Suffice to say, all the impacts of a depression are deeper and last longer.

In the past century, the U. It was the most unprecedented economic collapse in modern U. By way of comparison, the Great Recession was the worst recession since the Great Depression. Some economists fear that the coronavirus recession could morph into a depression, depending how long it lasts.

Unemployment hit According to NBER data , from to , the average recession lasted 11 months. This is an improvement over earlier eras: From to , the average recession lasted Over the past 30 years, the U. Given that economic forecasting is uncertain, predicting future recessions is far from easy. That being said, there are indicators of looming trouble. The following warning signs can give you more time to figure out how to prepare for a recession before it happens:. You may lose your job during a recession, as unemployment levels rise.

Not only are you more likely to lose your current job, it becomes much harder to find a job replacement since more people are out of work. This led to foreclosure by the banks holding the mortgages. An escalating foreclosure rate panicked many banks and hedge funds. They'd purchased mortgage-backed securities on the secondary market, and they were facing huge losses. Banks became afraid to lend to each other by August , because they didn't want toxic mortgage loans as collateral.

By December , employment was declining more rapidly than it had in the recession. The government launched an economic stimulus plan in In fact, it halted a four-quarter decline in GDP by the third quarter of , thus ending the recession. That pattern begins on an upswing but plunges again. High unemployment rates still persisted into It did not expect full recovery by the end of The cause of the recession was a "black swan event" as the global COVID pandemic required most businesses to shut down to avoid spreading the coronavirus.

Federal Reserve History. National Bureau of Economic Research. Business Cycle Expansions and Contractions. Federal Deposit Insurance Corporation. Bureau of Labor Statistics. Accessed April 26, Board of Governors of the Federal Reserve System. Congressional Budget Office. Securities and Exchange Commission.

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