What Is A Recession - Exactly

As I am writing this article, there are two buzz words that are making the rounds the world over - US elections and recession.  The elections are a matter of a few days away and so that will sort itself out.  But who ever is elected into office as the next President of the United States of America will have to deal first and foremost with the economic climate that is currently facing us, and how to make it as short and as painless as possible.

For the populist at large, I know that many are wondering:

• Exactly what is a recession?

• What causes such economic turmoil?

• How long will it last?

• How can the effects be reduced?

A recession is a downward trend or slowing down in the business cycle that will normally lead to a reduction in production, and this will adversely affect employment levels, since if productions are down, then profits will also be down, and businesses will need to reduce costs in order to survive. The major contributor to cost in any business is that of labour - so employment is cut.  Now this causes a vicious cycle since unemployment results in a reduced level of income for households, thus spending will be less.  This reduction in spending affects not just the purchase of goods but services as well as payment of bills and mortgages.

 

The diagram above shows a very simplistic view of what happens in a recession; but there is more.  The spiral described above will generally have a negative affect on investor confidence in the company as well as in the economy, and will result in the devaluing of shares.  This may have an even greater impact on the economy, resulting in even more down-sizing.

In coming to terms with what is a recession, you need to look at it from the point of view of what economists look for.  To them, a recession occurs when there have been two consecutive quarters with negative GDP growth.  GDP is an acronym for Gross Domestic Product, and is an economic measure of the country's total flow of it's goods and it's services produced over a specific period of time.  So what economist have said is that if this value is negative for two consecutive quarters, then the country is in a recession.  In some instances, the fear of a recession may be triggered if there has been two non-consecutive quarters within a year that had negative GDP growth.

One of the major forms of 'fuel' in shaping what is a recession is fear. When consumers become fearful of a looming recession - even if it may not be true - they will spend less, and this can have the same effect as a recession.  This leads me to what are some of the causes of a recession.  These may include:

• Speculation resulting in fear and a reduction in consumer spending

• A high national debt

• High rate of inflation

• Currency devaluation or the weakening of the dollar, which will adversely affect consumer spending power.

 We are quite familiar by now with the effects of a recession.  For the sake of mentioning; these will include foreclosures, unemployment, tightening of credit, bankruptcy, stock devaluation on the stock market.

Now that we have looked at what is a recession, what can be done to limit it's effects on you the consumer?

• For starters, revisit your budget with the view of tightening up on your spending.  Remember that your power to consume may be reduced, and that you may have to make the same income, or maybe even less, last longer.

• Differentiate between your wants and your needs, and focus on your needs.

• Negotiate lower rates on your credit cards and on your mortgage if possible

• Help your employer by finding innovative and cost effective ways of getting the job done.

There are a number of things that can be done to get out of a recession.  One such measure is for massive capital injection into the economy by government to help boost investor confidence and jump start the economy.

A second school of thought is to approach it from the suppliers side of things by cutting corporate taxes, with the hope that this will boost business investment, that will ripple down to ore money in consumers pockets.

The final school of thought on recession correction is to leave it alone and let it correct itself

So in this global village in which we live, to the question of what is a recession? Well it seems like the whole world is going through one now.  So buckle down.  We don't know how long this will last - hopefully not long.