Question: What is a Recession?
Answer: The official definition of recession is when GDP growth is negative for two consecutive quarters or more. However, you can feel like you are in a recession before it has officially started because it is usually preceded by several quarters of slowing but positive growth.
It feels like a recession when GDP growth slows, businesses stop expanding, employment falls, unemployment rises, and housing prices decline. For those reasons, many experts say the U.S. is actually in a recession now:
- GDP is slowing,
- Businesses are expanding more slowly,
- Employment is falling,
- Housing prices are down 10%.
Another good example was the stock market crash and subsequent economic downturn in 2000. This was not a recession in technical terms 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.
About the only good thing about a recession is that it will cure inflation. The balancing act the Federal Reserve must pursue is to slow economic growth enough to prevent inflation without triggering a recession. Currently, it must do this without the help of fiscal policy, which is generally trying to stimulate the economy as much as possible through lowering taxes, spending on social programs and ignoring current account deficits.
GDP FAQ
- What Are the Components of GDP?
- What Is the Difference Between GDP and Growth Rate?
- What Is the Ideal Growth Rate?
- What Is a Recession?
- What Is a Depression?
