What the Heck is a Recession Anyway?
Filed under
Money Thoughts
,
by
Alison
on
3:40 PM
1
The word 'recession' seems to be latest buzzword, but what is a recession really? Well, it depends on who you ask. The popular definition is two consecutive quarters of negative growth of the GDP (gross domestic product - the total dollar amount of all goods and services produced in a certain time frame) growth. But the National Bureau of Economic Research (NBER) defines a recession as a "significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
What causes a recession? Essentially, companies' profits drop, they in turn lay off employees and people have less money to spend, and the cycle continues. In the current case, the housing boom started it all. Banks loaning too much money for mortgages, then deciding to cut back coupled with homes losing value (which causes homeowners to feel not quite as wealthy as they once felt) and less homes being built (less work available in the construction and related industries) pretty much resulted in consumers not spending as much as they once were. Thus, companies don't profit as much and the cycle goes on.
So are we in a recession? Are we headed there? That too depends on who you ask. For the first quarter of 2008, the US reported a slight GDP growth (0.6% - the same as the last quarter of 2007). So by that definition, no recession. But that doesn't stop some economists (and non-economists) from declaring the US economy to be in recession based on other factors, such as unemployment and the fact that people just don't seem to be buying much.
Recession or not, what's really important is how the state of the economy affects you. Unemployment rates are high, which means having savings you can use in case of lost income is important. Investments aren't doing so great right now, but chances are in the long term, they'll be okay. Prices on everyday products are going up, so save where you can.
Here are some other recession articles you may be interested in:
