What Happens During a Recession?

During an economic recession, the GDP or Gross Domestic Product growth is negative and this negative GDP lasts for two quarters or longer. A negative GPD and a decline in employment that lasts for at least six months is, in fact, the very definition of a recession. However, more goes on during a recession than just negative growth in the GDP.

An increase in unemployment rate is one of the major effects of recession as many firms and companies resort to laying off their employees in order to cut expenses. This is also referred to as job cutting. As companies cut jobs, thousands will lose their employment. For many families, if even just one member of a family loses his or her job, it will cause a considerable imbalance in their household budget.

Eventually, as more people are laid off, the number of jobseekers will exceed the number of job vacancies available. In other words, the demand for jobs is greater than the supply of job opportunities during a recession. With this shortage in human resources, the productivity of the workforce in general is significantly affected.

During an economic recession, a normal response of the people is to save whatever money they have due to uncertainty about jobs. As a result, there will be an initial increase in the price of commodities and there will also be a significant decrease in consumers’ purchasing goods due to a decline in their level of confidence.

This decline is caused by the employment or financial crisis that is stirred up by the recession. The media often helps foster a loss of confidence, creating a certain frenzy wherein people tend to become rattled and worried about job cuts and financial matters. People then begin to curb their spending even more and will save up whatever they can, planning for a rainy day.

Since consumers are spending less money, companies cannot help but reduce the prices of their commodities in order to make any form of profit. These measures will often lead to deflation. As the price of commodities decreases, the purchasing power of consumers increases. This will have a positive effect on the economy and simultaneously, job opportunities will increase, thus this ultimately turns the recession around.  

Recession and Real Estate

Recession, and what happens during a recession, can have a tremendous impact on the real estate industry. Fiscal conservatism, which is a policy that advocates the decrease in government spending, causes people to avoid spending for real estate. Those who have lost their jobs and cannot find new opportunities, resort to putting their homes up for sale just to ease their financial instability. As a result, the supply of properties will increase during this period while the demand is extremely low, and prices of properties can significantly go down.

Stock Market

The stock market during a recession will often be very fickle. During the crisis, some will resort to selling their investments. When many people sell off their stocks simultaneously, a huge plunge will take place in the market.  

U.S. Recession in 2009

In 2008, the US was plunged into a recession as a result of a bursting housing bubble and several other factors. With the impact and the degree of seriousness of an ongoing recession such as what the US encountered in 2009 and early 2010, some estimate that the crisis has caused the sharpest fall in private consumption in over 20 years.

It is appropriate to expect recovery from this crisis, as recovery occurs as a natural consequence of recession, but will of course take time. Looking at the history of world economy, you may notice that about every seven to ten years, an economy will experience a recession. This is called the recession cycle.

Government Response

During an economic crisis, the government normally adopts economic policies such as decreasing taxation and increasing the money supply. In the US, the government has resorted to lowering the Federal Funds rate in order to boost the sluggish economy. As they attempt to revive the economy, regulators reduce their interest rates to attract more business and to help people take out loans easily.

The weakening of the American dollar will attract more foreign investors into initiating more business deals with the Americans. As this progresses, more firms will be able to boost their productivity as a result of the capital inflow and so, business can expand simultaneously and more jobs can be created during the regressive phase.