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What Is a Recession?

What Is a Recession?
Credit: Skorzewiak/Shutterstock

More than 10 years ago, several financial situations boiled over into an international crisis that buckled the world's economies. According to the National Bureau of Economic Research (NBER), the Great Recession claimed the jobs, retirement plans and livelihoods of millions from December 2007 to June 2009.

Since then, however, the United States has been in a relatively prosperous period. For more than 115 months, the American economy has been in its second longest period of economic expansion. Since June 2009, the country has seen an annual average employment growth of 1.4 percent and a 2.3 percent annual growth to the market value of all goods and services produced in the country, also known as the gross domestic product (GDP).

The economy is in a recession if experiences a steady decline with a drop in GDP for at least two consecutive quarters.

Recessions are generally considered a normal, albeit unfortunate, part of any business cycle, which goes through periods of contraction when the economy slows, expansion when the economy speeds up, and the peak, the upper turning point of the business cycle. Recessions typically last between six and 18 months.

Despite the post-Great Recession period's still relatively continued growth, economists say they've begun seeing warning signs that may spell problems soon. Last month, a CNBC Fed Survey of more than 40 economists, fund managers and market strategists reported that their "economic sentiment was at a new low" under the current administration.

"Employment's still growing, wages are picking up, retail sales are strong ... there's still some policy stimulus in the pipeline," Joel Prakken, chief U.S. economist at research firm IHS Markit recently told the Christian Science Monitor. "The very near term looks OK to me, but there are some storm clouds on the horizon."

To better understand what might be coming around the corner, let's take a look at what a recession is and what brings them on.

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 influence the U.S. economy. Examples include financial crises like the bursting of the housing or internet bubbles, each of which led to previous recessions. High interest rates, war and poor fiscal policies can also result in recessions. External factors play a role in starting a recession, such as the rising oil prices that led to a recession in the mid-1970s.

With the government shutdown still ongoing, continued trade tensions with China and worries of a faltering housing market in sight, a recession could be triggered as a result of such uncertainty.

"I don't think I've ever been this uncertain about my forecast," Robert Fry, chief economist of Robert Fry Economics, recently told Newsweek. "The uncertainty stems from uncertainty about tariffs and about the response of nonresidential fixed investment to both tariffs and tax reform."

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 seven months to six years.

The 1900s saw almost as many recessions, as well as the Great Depression, which lasted 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.

Economists are the ones who technically determine when a recession has ended. Today, that responsibility falls to the NBER. The NBER takes several factors into consideration when determining when a recession ends, including GDP, employment rates and industrial production. Since June 2009, household income levels have risen to pre-recession levels and unemployment has fallen.

Even with these welcome economic trends, it never hurts to prepare for the worst.

Andrew Martins

Andrew Martins is an award-winning journalist with a BA in journalism from Ramapo College of New Jersey. Before joining Business.com and Business News Daily, he wrote for a regional publication and served as the managing editor for six weekly papers that spanned four counties. He is a New Jersey native and a first-generation Portuguese-American, and he has a penchant for the nerdy.