Being a regular person, one never bothers about terms like Inflation & Recession. It is only the people in Finance or Investments or a few curious birds who tend to know these. Let’s say you searched on Google – “What is Recession?” I suppose you are either one of those curious asses or the ones new into Finance & Investment.
Well, it doesn’t really matter who you are and what you tend to do with the info I provide. It’s not like I can give you the recipe to create Power Puff girls, though.
Anyways, about recession, in this article, I’ll be talking about what Recession is and how it impacts companies, nations, and individuals like you.
Table of Contents :-
What is a Recession?
Recession, in the context of a nation, refers to the major slowdown or drop of the economy. A recession in a nation is declared when the GDP growth rate is negative for two consecutive quarters. As deforming as it may sound, a Recession is only but a natural occurrence that has to happen at some point in an economy.
The term recession became popular during 1974 when Julius Shiskin, an economist, began talking about it.
Generally, a Recession occurs when one or more of the indicators fall considerably. There are five indicators of recession. Let us understand them one by one.
Indicators of Recession
GDP (Gross Domestic Product)
The GDP of a country is an indication of the total value that its economy generates. The total value we are talking about is generated through the services and goods produced by the country. There are several technicalities involved in calculating the GDP. The most basic ones are Value generated, time frame, and inflation.
By inflation, I mean adjusting the numbers with the inflation rate to get numbers according to the current time.
Employment Rate of the country
People of your country being employed plays an important role in indicating a recession. More than an indicator, high unemployment rates add fuel to the fire of recession.
Say, a significant number of people are unemployed. Neither they produce goods, nor they produce services, which results in the economy not growing. In worse conditions, it triggers the decline of the economy, hence the recession.
You can yourself check if your countries employment rates indicate a good future or bad. Search on Google under your country name. And if you find the unemployment rate more than 7% of the total available workforce, consider it a red signal.
The calculation of personal income after adjusting inflation is called real income. The decline in real income results in people having less money. This results in a decline in the purchasing power of people and hence the way to the recession!
The manufacturing sector of a country includes all the imports, trades, and exports from various nations. The numbers involving the manufacturing sector indicate the self-sufficiency of an economy.
Retails & Wholesales
Just as the manufacturing sector, the retail and wholesale sectors too indicate if a country’s economy is on the rise or declining.
NBER of India
The point of having five different indicators is – The GDP reports are out after certain intervals, and a recession can very well prevail before a report is out. Therefore, the other four factors are taken into account. In India, the monitoring of these five indicators is done by NBER (National Bureau of Economic Research). The NBER acts as a non-profit organisation that has the responsibility to declare the starting and stopping points of a recession in India.
According to Julius Shiskin and after various modifications & adaptations, the recession has been termed with certain factors. A few are –
- The decline of at least 1.5% in GDP for at least two consecutive quarters.
- Cutting of jobs in various sectors for a period of six months or more.
- 6% or more rise in the unemployment rate.
- Manufacturing and wholesale sectors declining.
What causes a Recession?
We all must have heard that happiness never lasts forever. Life comprises both happiness and hardships. The same applies in the economic and business world. Expansions, growth, bullish trends never last. Fall is inevitable, and it is triggered by many visible and invisible factors. These factors include –
Deflation – Deflation is the opposite of Inflation. It refers to the drop in prices due to an extremely high drop in demand. The drop in demand causes a drop in price because the sellers lower the prices. This is done to attract customers and obviously out of the need to sell. Also, as the customers wait for the prices to come down, it creates a chain of events, such as – a slowdown of the economy, rise in unemployment. All these are causing recessions.
The Asset Bubble – This termed refers to the point where buyers buy and hold stocks, assets in large quantities. Because of the hope that the prices are going to the sky. But then, the bubble bursts and prices go down like crazy. No reason, no visible factors, still fear kicks in, and everyone pulls back on spending. This results in the great recession.
Economy Shocks – Just like a natural disaster, the economic shocks also happen without a message or alert and shake the whole system. We had our latest example just a year ago – The COVID outbreak. This pandemic caused economic disruption throughout the world.
Zero Consumer Confidence – There is no fixed time of fear. People are overpowered by fear in a second, and it spreads! The moment when fear kicks in and consumers get afraid of the economic crash, the crash happens. This fear also causes a decline in the GDP because around 70-75% of GDP depends on the consumers of the country.
What is Depression?
A recession that lasts more than a year is typically referred to as Depression. During normal times, a recession lasts for one or two quarters. An example of depression is the time period from 1929 to 1939. It was called the Great Depression and lasted for ten years! The economy was a mess! The unemployment rate during these ten years rose to 25%.
As for the example of recession – The recession of 2008-2009 is considered as one. The unemployment rates during this time rose to 10%, and GDP contracted for three straight quarters.
What is Correction?
When a whole market or just an asset entity loses its value by 10% or more, the situation is termed as Correction. It can happen to stocks, some bonds, or a whole index. The duration of a correction can be anything from days to years. However, normally it lasts for three to four months. Unlike recession and depression, it is comparatively easier to predict a correction.
The reason for a correction varies on the market or the sector it hits. It may be different for stocks, something else for bonds and indexes, etc. It is true that markets and entities face a loss of value by 10% or more, but corrections can be seen in a healthy way too. How? Corrections adjust the majority of overvalued prices and level the market. It is easier to enter the market after a correction, in my opinion.
Let me wink. (wink)
The Effects of Recession
Recessions, as we know, are caused by a downfall in the economy and create further downfall. This downfall takes a toll on companies and organisations, which results in people getting fired and more unemployment. Various sectors take such a hit that all the production and consumptions stop. Businesses and businessmen go bankrupt.
Consumer purchases go down to such an extent that industries are forced to cut down the prices significantly, and still, consumerism falls down. Thousands of people lose homes, and property prices fall tremendously.
The most adverse effect caused by the recession is on the career of youngsters who graduate from college. People say the first job is always important and acts as a foundation stone of the career. But what good does this statement do when it is a recession. Young people struggle to get a job, and thousands become jobless even before getting a job.
Among all the downsides, there is one thing that recession does well. It cures inflation. Sometimes, the Federal Reserve tries to trigger a mini-recession in order to cure inflation. What they do is – Slow down the economy to such a point where it cures inflation without causing a recession. But the minds behind need to think and act responsibly! It is not an easy task to bring an economy on the verge of recession and pull it back up again.
All in all, I have told you all that I know of Recession. I guess, now you can incorporate its meaning, ups, and downs in association with GDP and stock market. Knowing the basics only helps you a lot in making some of your financial decisions. For more information, you can refer this article by Investopedia.
Till then, Happy Investing! Reach out to me on my twitter – @sushrutkm