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What is a Recession?

recession
Generally, recessions last between six and 18 months.
Credit: Matthias Pahl | Shutterstock

A recession is an overall period of general economic decline. In order for the country to be considered in a recession, there must be a drop in Gross Domestic Product (GDP) – the market value of all goods and services produced in the United States – for at least two consecutive quarters. While usually less severe than a depression, a recession does come with dramatic economic effects. 

Consequences of a recession include increased unemployment, a drop in the stock market, the loss of personal income and business profits and a decline in the housing market. Though they are undesirable, recessions are considered a normal part of any business cycle, which also includes periods of contraction, when the economy slows; expansion, when the economy speeds up; and the peak, the upper turning point of the business cycle. Generally, recessions last between 6 and 18 months.

What causes a recession?

While there is no one answer as to what causes a recession, economists generally agree it takes a significant event with notable economic repercussions.  The causes can be domestic in nature or from decisions made in other countries that have an effect on the U.S. economy. Examples include financial crises like the bursting of the housing or Internet bubbles, each of which led to a recession. High interest rates, war and poor fiscal policies can also result in recessions. External factors can also play a role in starting a recession, such as the rising oil prices that led a recession in the mid-1970s. 

History of recessions in the United States

Recessions in the United States can be traced back to the 1700s. The first recorded recession, the Panic of 1779, was the result of deflation from the Bank of England. The recession lasted more than three years and caused major disruption in the commercial and real estate markets. The Embargo Act of 1807 was to blame for a three-year recession between 1807 and 1810. The act restricted foreign trade and took a huge toll on the U.S. shipping industry.  Throughout the rest of the 1800s, there were more than 20 recessions and one depression. The recessions ranged from just seven months in length to as long as six years. 

The 1900s saw almost as many recessions, as well as the Great Depression, which last nearly four years from 1929 to 1933. One of the worst recessions in the 1900s was the Panic of 1907, spurred by the failure of the Knickerbocker Trust Company and a stock market crash. Starting in 1980, recessions became less frequent. There have been just five recessions in the last three decades, and none lasted longer than 18 months. An eight-month recession in 2001 was caused by a combination of several factors, including a sharp decline in Internet-based businesses and the attacks of September 11. The most recent recession, considered one of the worst in history, lasted 18 months and was caused by the collapse of the housing bubble and subsequent downfall of numerous longtime financial institutions, including Lehman Brothers, AIG and Bear Sterns. Coined the Great Recession, the economic downturn was the worst to hit the U.S. economy since the Great Depression.

The end of a recession

Economists are the ones who technically determine when a recession has ended. Today, that responsibility falls to the National Bureau of Economic Research. The NBER takes a number of factors into consideration when determining when a recession ends, including GDP, employment rates and industrial production. While levels might not have returned to those before the recession, the end of the recession can generally be seen when businesses start hiring and consumers start spending again.

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