Generally defined as a prolonged decline in economic growth, a recession is 1 of 4 phases in the business cycle that spans from growth to peak to recession to trough. It has a significant impact on financial conditions, investment activity, government budget policy and general living standards.
A recession may be hard to identify, especially when it is just beginning. As the economy slows down, companies often cut costs by reducing employee hours and eliminating positions. This leads to lower consumer spending and can further slow down the economy as workers stop spending and banks tighten credit.
Investors may also become more cautious in times of uncertainty and lessen demand for stocks. Companies may also be less willing to invest capital, which can slow down future growth potential. In addition, a currency in recession may lose value against other currencies, increasing import prices and hurting exports.
The severity of a recession is dependent on many factors, including the speed at which it begins and ends. The recent Great Recession lasted from December 2007 to June 2009, and was the longest and deepest recession since 1960.
Many factors can trigger a recession, but the most obvious one is a sharp drop in gross domestic product (GDP). GDP measures all goods and services produced. GDP peaked in the housing market in 2006, and declined rapidly as the financial crisis hit. This was the most serious recession since World War II, and it had far-reaching effects on global economies, families and individuals.