A guide to economic recession has become necessary, especially in this current economic downturn, which is associated with high unemployment, slowing gross domestic product, and high inflation.
What is the Economic Recession?
Economic recession is a general economic downturn. Which is typically characterized by a drop in the stock market. An increase in unemployment, as well as a decline in the housing market. It is a significant decline in general economic activity in a designated region.
How Recession Works – Economic Indicators
These are the indicators to watch if you want to. Have an idea about when the economy is in a recession:
Employment and real income both tell the commissioners all about the overall health of the economy.
Real income measures personal income which is adjusted for inflation. Payments transferred. Like Social Security and welfare payments. Are removed. When real income declines, consumer purchases, and demand also declines.
Monthly GDP Estimates
Monthly estimates of GDP offered by Macroeconomic Advisers. Is also monitored by NBER.
Understand that the stock market is not an indicator of a recession. Rather it reflects the anticipated earnings of public companies.
If a recession happens, the stock market may enter a bear market. Indicated by a decline of 20% or more over at least a two-month period. A stock market crash can also cause a recession owing to a large. Number of investors who lose confidence in the economy.
Recession Vs. Depression
Recession is adjudged to be less severe than depression. The blame of recession mostly falls on the federal leadership. Often either on the president himself, the head of the Federal Reserve. Or the entire administration. Understand that a recession that lasts long enough can become a depression. In a recession, the economy contracts for two or more quarters. While a depression will last several years.
Factors Responsible for Recession
Reduced Consumer Confidence
This is when consumers believe that the economy is bad. When this happens, they are less likely to spend money. Even though consumer confidence is psychological, it. Can have a real impact on any economy.
High-interest rate is another common cause of economic. Recession because it limits liquidity or the amount of money that is available for investment.
Also, inflation is also a factor that causes a recession. Furthermore, inflation here refers to a general rise in the prices of. Goods and services over a period of time. As inflation increases, the percentage of goods. And services which can be purchased with the same amount of money decreases.
Reduced Real Wages
Another recession causing factor is reduced real wages. Which refers to wages that have been adjusted for inflation. Falling real wages implies that a worker’s paycheck is not up-to-date with inflation. Note, the worker might be making the same amount of money. But his purchasing power has been reduced.
Benefits of Recession
In as much we would like to look at a recession in a negative light. One good thing does come out of Inflation. Recession cures inflation. The Federal Reserve always has to balance between slowing the. Economy enough to prevent inflation without triggering a recession. Usually, it does this without the help of fiscal policy.
How the Recession Affects an Individual
Economic recession is quite destructive because it creates widespread unemployment. And this is when it hits people the most. As the rate of unemployment rises. Consumer purchases fall off further and businesses can become bankrupt.