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What Is an Economic Recession?

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Economic recession

One of the last signs of a recession is long lines at job fairs.

Credit: John Moore/Getty Images

Question: What Is an Economic Recession?

Answer: An economic recession is when growth slows, usually due to a fall-off in consumer demand. As sales drop off, businesses stop expanding. Soon afterwards, they stop hiring new workers. By this time, the recession is usually underway. However, it doesn't affect most people until layoffs begin. As unemployment rises, and consumer purchases fall off even more, housing prices usually decline. Using that definition, most experts agreed the U.S. entered the most recent recession in 2007. However, unlike most recessions, demand for housing slowed down first. That's why most experts thought it was just the end of the housing bubble, not the start of a new recession. Here's the facts:

What's not really helpful in knowing what a recession is? The textbook definition of a recession, which states that GDP growth must be negative for two consecutive quarters or more. By that time, the recession has usually been well underway. That's because, for all practical purposes, a recession starts when there are several quarters of slowing but still positive growth. Often a quarter of negative growth will occur, followed by positive growth for several quarters, and then another quarter of negative growth.

A good example was the stock market crash and subsequent economic downturn in 2000. This was not a recession according to the textbook, because GDP growth was negative in Q3 2000, Q1 2001, and Q3 2001, none of which were consecutive. However, anyone who lived through it knows that it felt like a recession during all that time. And in fact, GDP growth did not reach over 3% until Q3 2003.

Another good example is the most recent recession, also known as The Great Recession. There were four consecutive quarters of negative GDP growth in the last two quarters of 2008 and the the first two quarters of 2009. However, the recession actually started in the first quarter of 2008. The economy contracted slightly, only .7%, rebounding in the second quarter to .6%. The economy lost 16,000 jobs in January 2008, the first time since 2003 -- another sign the recession was already underway.

The only good thing about a recession is that it cures inflation. The balancing act the Federal Reserve must pursue is to slow the economy enough to prevent inflation without triggering a recession. Usually, the Fed does this without the help of fiscal policy. Politicians, who control the Federal budget, generally try to stimulate the economy as much as possible through lowering taxes, spending on social programs and ignoring the budget deficit. This is how the U.S. debt grew to $10.5 trillion before a penny was spent on the Economic Stimulus Package. (Updated June 30, 2011)

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