Economic Recession - What Happens During a Recession

The National Bureau of Economic Research (NBER) defines economic recession as a significant decline in economic activity lasting more than a few months. Other than Gross Domestic Product growth, factors such as the current national unemployment rates, consumer confidence and their level of spending are also considered while determining whether the economy is going through a recession.

What Happens During a Recession
In an economic recession, Gross Domestic Product growth is negative for a period of two quarters or more. In the beginning, positive growth in achieved in spite of several quarters slowing considerably. The first quarter of negative growth will be followed by a few quarters of positive growth and then again negative growth will return.

Unemployment and Recession
Unemployment levels rise as a result of many firms resorting to decreasing the number of staff as a part of cost cutting. The number of people looking for employment far exceed the number of job opportunities created. With fewer people left to contribute, the productivity in the economy is seriously affected. During a recession, it's a normal tendency of people to save money. There is decline in the levels of spending by consumers due to decline in their confidence levels. This decline in confidence level may be triggered by financial or employment crisis. As a result of reduced spending by the consumer, the business firms are forced to reduce prices of the commodities to attract consumers. Such drastic measures very often lead to deflation. As the prices decrease, the spending capacity of consumer increases. This in turn improves the economy, with simultaneous increase in job opportunities.

Government Role During an Economic Recession
During a recession, the government adopts expansionary macroeconomic policies like increasing money supply and decreasing taxation. In the US economy, the Federal Government resorts to lowering the Federal Funds rate to revive the slowing economy. While reviving the economy, the interest rates are reduced by the regulators in order to attract business and help people to borrow money at a reduced level. This decreases the value of the American dollar, and thus attracts foreign investors who look forward to initiate business with the United States. Due to this development, corporate firms are able to increase productivity with this inflow of capital and expand their business simultaneously, creating more employment opportunities in a regressive phase.

Real Estate and Stock Market Behavior During Recession
Even the real estate industry is affected by recession. Due to implementation of fiscal conservatism, a fiscal policy advocating the reduction in government spending, people tend to avoid dealing in real estate during recession. Even the people who have lost their jobs resort to selling their homes to make up for financial instability. Due to this increase in supply of properties during the period of low demand, the prices of the properties are slashed considerably. Recession also makes the stock market fickle. During this financial crisis, some people opt to sell their investments as the last resort. As a result of many people selling off their stocks at the same time, a sharp decline is triggered in the stock market.

Impact of Recession on Individuals
The first and the foremost peril of recession is job cutting. As the companies take to cost cutting, thousands of individuals lose their jobs. It becomes further more difficult to find a new job in this regressive phase. Even a single earning member of the family losing a job can lead to imbalance in household budget. A sharp fall in the stock market is triggered due to high exposure in equity, making the stock market a very volatile entity. Initial rise in the prices of commodities affects the consumer's capacity to spend.

The depth and the seriousness of the ongoing recession can be estimated by the fact that this recession has seen the most prominent fall in private consumption in last 20 years. Taking this fact into consideration, it is wise to anticipate that recovery from this economic recession will definitely take some more time.