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In Economics, what is a Recession?

Tricia Christensen
Updated May 16, 2024
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A recession is a decrease of less than 10% in a country’s Gross Domestic Product (GDP). The decrease must last for more than one consecutive quarter of a year. The GDP is defined as the sum of private spending and government spending on goods, services, labor and investment.

The terms recession and depression are often confused. It can be said that a recession is in general not as severe as a depression. A recession tends to resolve more quickly.

Not everyone agrees on a specific definition for determining an economic recession, but most can point to several factors, which can cause a recession. Either significant drop in prices, or significant increases in prices can occur. A drop indicates that people may spend less money, thus the GDP is decreased. An increase in price may also reduce both private and public spending and thus decrease the GDP.

In some ways, it is quite natural for countries to experience mild recessions. This is a built-in or endogenous factor of a society. Spending and consumption are going to increase and decrease, as will prices. However, another factor besides these occasional built-in drops in spending is needed to evoke a recession. Usually, something changes quickly and provokes sharp increase or decrease in prices.

A recent recession in early 2000 was caused by the sudden decrease in activity of the dot.com industry. In the 1990s, the telecom industry had made huge amounts of money and began to overreach its expectations in terms of assessing future demand. Suddenly, the previously looked for demand was much lower than expected, leading to mass layoffs, decrease in production, and thus decrease in spending.

The dot.com fall is considered a “shock” in the GDP, which can fall sharply if the product or industry falls in production and spending. Though the recession resulting from the dot.com bust was considered over by 2003, it has far-reaching consequences that are still felt.

Those who initially made excessive amounts of money may still find themselves jobless. Telecom companies significantly cut jobs, and employment rates in the industry have never fully been restored. Telecom companies also cut costs by outsourcing production to foreign countries. While this outsourcing has allowed some companies to continue operations, it left many with training for specific jobs they could no longer perform.

However, other industries have since expanded and raised the GDP. So the recession is termed over even though many still feel its effects on a personal level. Terming a recession as “over” does not necessarily account for positive economic changes for the individual.

For example, sometimes recession is evaluated in terms of the country’s jobless rate. When this is the case, and people find jobs, failure to evaluate changes in income can make the economy appear more productive than it actually is. A former telecom employee who now works at Wal-Mart may have a job, but this job is not equivalent to former work in compensation. So analysis of only one aspect of a recession should not be used to indicate economic recovery.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Tricia Christensen
By Tricia Christensen
With a Literature degree from Sonoma State University and years of experience as a SmartCapitalMind contributor, Tricia Christensen is based in Northern California and brings a wealth of knowledge and passion to her writing. Her wide-ranging interests include reading, writing, medicine, art, film, history, politics, ethics, and religion, all of which she incorporates into her informative articles. Tricia is currently working on her first novel.
Discussion Comments
By lally2301 — On Sep 11, 2012

Everybody must improve their income, either salary or pension Between 2013 and 2014, the vast majority of products on the market price will rise more than 10 to 15 percent of its current value. The reason is More dollars will be printed, which will generate more inflation.

By lally2301 — On Sep 04, 2012

Not only will the remaining 1.5 trillion (out of 2.65 trillion) from last QE2 be placed in the next months –creating more inflation- but also new signs of upcoming QE3 are part of Mr Obama’s administration on or before Dec 2012.

We have to understand that the purpose of next QE3 -and maybe QEn - will be:

Push up asset prices (10 percent); push stock prices up temporarily (10 percent); and

finance the budget deficit (80 percent).

Why does the US government do this? Because they need money due to the huge fiscal deficit. Then, they ask, "Could you please print fiat money for me because I have a lot of debt?" Bernanke says, "Yes sir," and this is the way how debt is monetized.

Then what does the US Government do? They create secure government bonds (I owe you papers to the Federal Reserve) and they have to set them up at lower yield or lower interest rates.

For that reason, the US bank interest rates rely on US government bond yields and they are now at rock bottom as a result of the Federal Reserve creating fiat money, by monetizing its debt.

By lally2301 — On Aug 15, 2012

Unfortunately, the unemployment rate will increase in the long term. Why? The Federal Reserve Bank will have to release the remaining money -- $2.56 trillion deposited in banks, to be delivered into the American economy.

Also, the European Central Bank (ECB) will continue printing more Euros through the new LTRO to rescue economies in trouble like Spain, Portugal, Italy and Ireland in the next 12 months. This release of new Euros means more fiat currency into the market.

What will it create, all of this printed fiat money? It will create more global inflation, causing prices to increase. Therefore, this prolonged recession will become a New Great Depression (2016-2017??). So what to do? Should you invest in stocks mow?

The stock market will be in trouble in the next years, and unfortunately, is dying.

Based on my own research and reading "The Conspiracy of The Rich," the stock market will begin to collapse about 2016-2017, and just a few smart investors will make a bloody killing. Unfortunately, the amateurs and uneducated baby-boomers will be dead.

By lally2301 — On Jul 25, 2012

What to do for a safe retirement? Do I have to invest in stocks, bonds or mutual funds?

I have to say this: you must get more financial education, and make extra money every month through a residual income.

By lally2301 — On Jul 19, 2012

In North America, most workers have a Defined Contribution Plan (DC Plan) such as 401(k) in USA, and RRSP in Canada. This DC Plan means that your retirement income depends on how much you have contributed to the pension plan. So if the stock markets go down as expected, all your retirement contributions will be wiped out and you will receive nothing and you can be in a big trouble.

By lally2301 — On Jul 05, 2012

Financial problems, global recession and the new coming depression. Is there any correlation among them?. I truly believe that when individuals, families and governments keep on confusing assets with liabilities, they generate detrimental problems with their own financials.

This huge problem is a lack of financial education and starts in early childhood, when we learn to speak a language about money and we create a relationship and thoughts about money and the most frequent messages are: "Go to school and get good marks", "Go to college or university", "Get a good job with good benefits", "Work hard", "Save money", "Buy your house", "Do not have debt," and "Do not invest because it is risky."

By lally2301 — On Jun 15, 2012

It is not time to think about what caused the return to recession and how long it will last. This financial situation has been created a result of "excessive credit and printed money" generated after 1971. Unfortunately, governments will continue with more bailouts to help countries to repay their debt(???)

That means "Print more fiat money" either through LTRO in Europe and QE in USA, resulting in even more inflation, whose symptom is to raise the prices of most products that will unfortunately end up in the next depression about 2015-2016.

Now, more than ever, we must get more financial education, and act to be prepared how to protect our family and beloved ones. There's is still time, but act now.

By lally2301 — On Jun 07, 2012

Unfortunately, this global recession will continue after the results of more than 40 worldwide national elections during 2012-2013, and then a new global depression will occur (2015-2016) and it will be worse than the 1930's. Why? Because most governments, and whoever is the next president or prime minister, will continue printing money (QE or LTRO) during 2013-2015 in order to "solve debts and pay unfunded liabilities".

During this year of 2012 you still might hear some good news but it will be temporary, because the economy during 2013-2015 will become very harsh. Let's cope this Global Recession by acting wisely and getting consistent financial education.

In my opinion, you can either build up a A) Good business or B) Invest in undervalued assets. With this approach you can be ready for the next years when a new global depression will occur and might last another 10 more years (2016-2026).

By lally2301 — On May 31, 2012

This global recession started a few years ago and will go in the next years into a new depression that I think will be worse than the Great Depression of the 1930s. In the meantime, it's time to get more financial education to cope with the recession with a great attitude either by creating A) a "recession proof" business or B) Investing in vehicles that provide you a good return on your investment (ROI) -- as long as you have done a great deal of research of the markets, the investment profitability and your skills.

Two great recession-proof business that can give you a good residual income might be in the early phase of a great network marketing company like Ganoexcel or becoming an affiliate marketer.

By lally2301 — On May 25, 2012

Which option is the best to talk about a recession or act? I really prefer acting now, in spite of any bad circumstances, and one of the best things I do is continuously get more financial education.

Yesterday, I learned the whole world is coping with an enormous amount of debt and cannot repay it. This is one the reasons why financial markets (starting from the stock markets) and banks will crash in the next years.

Just look at this: the USA reserve ratio is 1 percent compared with China, which has 20 percent. What a huge difference! What does it mean? The lower the reserve ratio (RR) the more credit is created.

Why is there a lot of financial turmoil and high unemployment rate in Greece, Spain, Italy, Ireland and Portugal? Because they have too many liabilities, too many expenses and borrowed more currency (Euro) to pay back their debts. This printing process is called a Long Term Refinancing Operation (LTRO). It's the same in the USA. They will continue printing more currency and will create more credit, but in the end, almost all the world's population will not be able to pay it back.

By lally2301 — On May 18, 2012

What else to do?. We cannot be just simple spectators and see how the economy in many European countries is getting worse. A similar scenario will be in place in the USA in 2013 as well, and with all due respect, I do not believe that politicians will solve this problem.

However, if we had a good financial education and take action, we can do a lot for ourselves and our families. In these times, investing in mutual funds for the long-term and diversifying is very risky. The stock markets will crash in 2014-2015 and most of the money invested in stocks will be wiped out.

During 2012 there will be a lot of good news because we are in national elections in more than 40 countries in the world. Then, 2013 will be a hard year to enter into a global depression in 2014 or 2015. Let's take action now.

By anon268558 — On May 14, 2012

It is really unfortunate to see what is happening in some European countries, Portugal, Italy, Ireland, Greece and Portugal, which are coping with some kind of recession. Spain is coping with 25 percent unemployment rate and Greece is almost in bankruptcy.

Is there any lesson and blessing we can learn from this situation? Lesson: Do not spend too much money and have fewer liabilities.

Blessing: We can do something now. Invest in your financial education and act now.

Most of these countries that are financially in trouble have spent too much money. They do not have it and kept borrowing more money to pay their debts.

2013 will be a year of expected global recession, to move to a Global Depression (2014-2015?) after the US stock markets crashes and the end of the American Dollar.

The best way to protect yourself is get financially educated and learn how to create your own business and invest in undervalued assets.

By anon267753 — On May 11, 2012

@anon12345: Thanks for the info. It was really helpful.

By lally2301 — On May 08, 2012

I truly believe that financial education is the key for all kinds of financial challenges, including a recession or depression. The economy does not dictate your financial circumstances. As somebody said, "Thank you, economy," because he knows how to find great deals.

Anybody can get started reading books from successful people and investors, and with all due respect, not from financial planners or bank CEOs, who tell you how to deposit your money for the long-term.

The best way to protect yourself is to learn how to set up your own business: 1) create a business; 2) invest in real estate; 3) buy smart stocks from savvy investors, not from Wall Street or similar ones and 4) invest in commodities. How can you achieve that? Financial education is the main key. 2013 will be the year for global recession to a Global Depression in 2014-2015 and it will last for eight to 10 more years. Hope is OK, but taking action changes any reality.

By lally2301 — On May 02, 2012

A double-dip recession is already happening in the UK, and some European countries either will experience or have a similar situation such Portugal, Ireland, Italy, Greece, Spain.

What about the USA? I am pretty sure that a deep recession will show up in the USA during 2013 that will finalize into a depression with hyperinflation about 2014-2015 and it might last for another 10 more years, like in 1929-1939. However, just 5 percent of the population will become wealthy or super wealthy because they are prepared in advance.

Who knows if I'm right? How to deal with it? How can I make money? Financial education is the key.

By lally2301 — On Apr 29, 2012

First of all I would like to give my own definition. I consider a recession as a slowdown in economic activity, expressed as a decline of the GDP in the last two quarters, characterized by less employment, low investment capacity, lower household income, lower business profits and rise of the unemployment rate.

By laluna — On Nov 25, 2009

The recession of 2008/2009 is the 14th recession that United States has had since the Great Depression of 1929.

One good thing to remember is that all of the past recessions were followed by good economic times, times of prosperity.

There is every reason to believe that this recession will not be an exception and that it will be followed by prosperous times too.

By anon41707 — On Aug 17, 2009

Thank you. The language is simple, but it's still economics.

By anon40639 — On Aug 10, 2009

Thanks a lot for your metadata. I'm really enlightened by reading, this but i need some more information regarding the differences between Recession and Depression. I can assure you that even school children will have an idea by reading this article. simply superb.

By anon28973 — On Mar 25, 2009

pls tell me what some causes of a recession are?

what are the causes of the present recession going on?

By AndrewE — On Mar 05, 2009

Whether what we are experiencing now is recession or depression, one thing i am sure of -- we're on bad soil. The instability of our economy is causing a lot of stomachs to be half-filled or worse empty. During these times, we have to set our priorities as regards to spending. I think we can survive this crisis if we will strive on managing our finances properly. This advice is directed specifically to impulse buyers. Let us learn how to differentiate our needs from our caprices. Since we don’t know when our economy will stabilize, let us make it a point to save for the rainy days.

By anon27555 — On Mar 02, 2009

when will the current recession be over?

By anon23817 — On Jan 03, 2009

1.please tell me more about GDP?

2.what is the cause of current recession going on?

3.what are the effects of the current recession on world as well as indian economy?

By anon20524 — On Nov 02, 2008

actually that was quite clear:)

By anon20415 — On Oct 30, 2008

Thank you for the information it was very clear and understandable.

By anon18598 — On Sep 25, 2008

Thanks for the information. A Very nice short explanation.

By anon7670 — On Jan 31, 2008

now i know what is recession, thanks for the information.

By anon7464 — On Jan 27, 2008

thanks for the information provided in this article! nicely done

By anon805 — On May 04, 2007

has the sept 11 terrorist attacks caused an economic recession?

Tricia Christensen
Tricia Christensen
With a Literature degree from Sonoma State University and years of experience as a SmartCapitalMind contributor, Tricia...
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