An economic recession is the term used to describe a significant decline in economic activity in a particular region, which can last a few months to even years. This is indicated by the area’s declining gross domestic product (GDP), increasing level of unemployment and shrinking production and consumption, among other factors. For the average individual, a recession could mean having a promotion delayed, losing a job or needing to cut back on expenses and luxuries.
Economic Recessions: History, Causes and Characteristics
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Nathan Paulus
Director of Content Marketing, MoneyGeek
Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy. Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.
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Beverly Mendoza, Ph.D.
Assistant Professor of Economics and Finance at Stephen F. Austin State University
Dr. Beverly Mendoza is an Assistant Professor of Economics and Finance at Stephen F Austin State University. She completed her Ph.D. at Indiana University in 2019 and undergraduate studies at Texas Tech University in 2013. Her research interests lie in International Trade, which include firm export behavior and trade policies. Beverly has published her solo-authored paper titled, “Experience and Market Signals in Export Entry Decisions,” in the World Economy. She has also presented her research in several conferences such as the annual Southern Economic meetings and Midwest Trade.
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Doug Greene
Owner of Signature Properties
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Jeff Zhou
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Brendan Sheehan
Managing Director at Waymark Wealth Management
<p>Brendan Sheehan, MSFP, CFP®, is the managing director at Waymark Wealth Management. He graduated with a degree in psychology and ultimately chose a career in financial planning. He employs behavioral finance to help impact his clients' financial success. Over his 20+ year financial planning career, Brendan has gained extensive experience in comprehensive wealth management, retirement planning, investment portfolio construction, education funding, insurance and risk management, tax planning, charitable giving and estate planning. His unique ability is to take his clients' complex visions and break them down into simple plans, helping his clients move from where they are today to where they want to be tomorrow.</p> <p>Brendan still is involved with the Boy Scouts of America (BSA) and is an Eagle Scout. His daughter, Caeli, is one of the first females to become a Scout after BSA opened to girls in 2019. He has also been an active member of a local CrossFit gym for over 10 years. When they are not spending time with friends and family, Brendan, his wife (Sue) and daughters (Caeli and Emma) are taking care of their five pets — German Shepherds (Timber and Kammie), ferrets (Luna and Nala) and bearded dragon (Nugget).</p>
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Don Uy-Barreta
Professor of Economics
Don Uy-Barreta has been teaching economics around the San Francisco Bay Area since 1999. Prior to joining academia, he previously worked as a Portfolio Analyst at Franklin Templeton Investments for nearly 12 years. Don was previously a Fellow under the Education Advisory Group at the Federal Reserve Bank of San Francisco. He was also an EPIC Fellow at the Global Studies Department at Stanford University. He has guest lectured in the Philippines, Indonesia, and the United Kingdom on the topics of globalization and international trade.
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Steven Carnovale, Ph.D.
Associate Professor of Supply Chain Management at Florida Atlantic University
Dr. Carnovale is an Associate Professor of Supply Chain Management at the College of Business at Florida Atlantic University and Co-Editor-in-Chief of the Journal of Purchasing and Supply Management. He is a supply chain strategist specializing in interfirm networks, risk management and global sourcing/production networks with a specific focus on equity-based partnerships. Dr. Carnovale earned his B.S. and Ph.D. degrees at Rutgers University, specializing in Supply Chain Management and Marketing Sciences. He is a frequent speaker at both academic and professional supply chain meetings on topics related to supply networks & analytics, with a specific focus on how firms can use these concepts to generate enhanced visibility and financial performance within their supply chains and extended enterprises.
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Nick Maeder
Assistant Professor of Economics at Knauss School of Business, University of San Diego
Nick Maeder joined the University of San Diego's Knauss School of Business in 2020 as an assitant professor of economics. He completed his undergraduate studies at the University of St. Gallen, Switzerland and holds a PhD in Economics from Vanderbilt University. His primary research interests lie in the fields of macroeconomics and macro-finance with a topical focus on financial crises and a methodological focus on the decision-theoretic foundations of contemporary economic theory.
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Yao "Henry" Jin, Ph.D.
Associate Professor of Management at Farmer School of Business, Miami University
Yao "Henry" Jin received his Ph.D. from the Sam M. Walton College of Business at the University of Arkansas. Drawing on his retail industry experience, his main research interest focuses on retail supply chain and operations concerning issues related to collaboration and demand planning. He has published his research in journals such as the Journal of Operations Management, Journal of Retailing, and Journal of Business Logistics, among others. Currently, he is working on projects regarding counterfeit products and service failures in omni-channel retailing.
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Dr. Linda Loubert
Associate Professor of Economics at Morgan State University
Linda Loubert is a Political Economist with a Ph.D. from the University of Texas at Dallas. She completed a postdoctoral research fellowship at the University of Michigan in the Ford Foundation Program on Poverty and Public Policy and Program for Research on Black Americans at the Institute for Social Research. Currently, she is an associate professor and interim chair of the Economics Department at Morgan State University, as well as the Graduate Coordinator for the Department. She is certified as a professional in Geographical Information Systems (GIS). She has served as treasurer for the National Economic Association in the past and is presently a member of the board. In other venues, she serves as a governor-appointed member of the Open Data Council for Maryland, a board member of local organizations in Baltimore, and a board member of the College of Liberal Arts and Sciences Advisory Board at the University of Kansas.
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Max Gillman
Friedrich A. Hayek Professor of Economic History at the University of Missouri – St. Louis
Max Gillman is an F. A. Hayek Professor of Economic History at the University of Missouri – St. Louis. His research includes monetary economics, macroeconomics, public finance, asset pricing and development. He is the associate editor of Economic Modeling. Gillman's books include The Spectre of Price Inflation (Dec. 2022, Agenda Publishing; 2023, Columbia University Press). He was also the editor of Robert E. Lucas, Jr., Collected Papers on Monetary Theory (Harvard University Press, 2013) and the author of Advanced Modern Macroeconomics: Analysis and Application (Pearson, 2011). Recently serving as a visiting scholar at the Bank of Finland (May 2022) and upcoming as a senior researcher at the Corvinus Institute of Advanced Studies (Budapest, 2023), Gillman has published in the Journal of Monetary Economics, Review of Finance, Journal of Money, Credit and Banking, Economic Journal, Journal of Human Capital, Journal of Economic Dynamics and Control, Review of Economic Dynamics, Journal of International Money and Finance, and many other journals. Previously, he served as a Professor of Economics at Cardiff Business School and Central European University.
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Jay Walker, Ph.D.
Associate Professor of Economics at Old Dominion University
Jay received his B.S. in Economics and Finance from Arkansas Tech University and a MBA from the University of Mississippi. For five years after receiving his MBA he worked professionally as an analyst in the insurance and retail industries. Following the receipt of a PhD in Economics from the University of Memphis in 2012 he spent five years in western New York state at Niagara University prior to joining Old Dominion University in Fall 2017.
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Winnie Lee, Ph.D.
Department Head and Director of Doctor of Economic Development (DED) Program, Department of Economics, Applied Statistics, and International Business and Professor of Economics at New Mexico State University
Winnie Lee serves as the Director of the Doctor of Economic Development (DED) Program and is a Professor of Economics at New Mexico State University. She earned her Ph.D. in Economics from Southern Illinois University. Winnie's research interests include International Economics, Regional Economic and Business Studies, Economic Development and Growth, and the International Monetary System.
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Joelle Leclaire, Ph.D.
Professor of Economics and Finance at the State University of New York, Buffalo State
Joëlle Leclaire is a Professor of Economics and Finance at the State University of New York, Buffalo State, where she teaches Macroeconomics, Economic Statistics, Money and Banking and supervises graduate students working on these topics. Leclaire serves on the Editorial Board of the Review of Political Economy, an international academic journal, as a member of the Progressive Economics Forum in Canada, and on the Advisory Board for the SJI Fund. Her research looks at the connection between the real and financial sectors of the economy and the role of private and public debt on financial and economic macro-stability. She has been invited to present her work at numerous top conferences and graduate summer schools around the world, has served on international expert bodies such as the Institute for New Economic Thinking Private Debt Initiative, has served as an external Ph.D. advisor at the Université de Sorbonne, Paris Nord, and, has organized international conferences. Leclaire has published articles in the Journal of Post Keynesian Economics, the International Journal of Political Economy, the Review of Political Economy, the International Journal of Economics and Economic Policies, and contributed several chapters to edited volumes. She authored the book The Great Deficit Debacle (2008) and edited Heterodox Analysis and Financial Crisis and Reform (2011). She is also regularly interviewed for local, national and international newspapers, television, radio and podcasts in English and French, including ABC News, the Buffalo News, Buffalo Business First, WGRZ, WBEN and Radio-Canada.
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Prasenjit Ghosh, Ph.D.
Assistant Professor at the University of Southern Indiana
Dr. Ghosh serves as an Assistant Professor in the Department of Economics and Marketing at the University of Southern Indiana. Holding a Ph.D. in Applied Economics from Auburn University, his research delves into areas such as production analysis, crop insurance, water resources management, computational economics, and monetary economics. His works have been featured in peer-reviewed journals such as Energy Policy and The Geneva Papers on Risk and Insurance-Issues and Practice.
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Malcolm Robinson, Ph.D.
Professor of Economics at Thomas More University
Dr. Robinson graduated from Rutgers College in 1981 with a B.A. in Economics and received his Ph.D. in Economics from the University of Michigan in 1992. He was hired as an Assistant Professor in 1997 and was promoted to Professor in 2007. He has added 14 courses to the catalog, including Money and Banking and Health Care Economics for Managers. He was honored as Outstanding Faculty Member of the Year in 2007 for Thomas More, an "Outstanding Educator" in Cincinnati in 2012, and the Outstanding Graduate Faculty member of the Year in 2020 for the College of Arts and Science at Thomas More University.
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Bill Davis
Real Estate Broker at Huntington Group
Bill Davis is a seasoned real estate broker with over 44 years of experience in the industry. With a deep understanding of the real estate market and an immense amount of knowledge in property sales, leasing, and financing, Bill brings a wealth of expertise to every project he undertakes. His background in residential, commercial, and industrial projects, as well as his expertise in real estate contracts and knowledge of the entitlement process, allows him to provide valuable insights and guidance to his clients.
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Dr. Maria Edlin King
Director of the Tennessee Council on Economic and Free Enterprise Education at the Middle Tenessee State University
Dr. Maria Edlin King is the director of the Tennessee Council on Economic and Free Enterprise Education in the Jennings A. Jones College of Business at Middle Tennessee State University (MTSU). The Council provides professional development to teachers and community educators connecting with 800-1000 teachers per year. She also teaches macroeconomics to 150-250 undergraduates each semester. King received her Ed.D. in Curriculum and Instruction from Tennessee State University, M.A. in Economics and B.S. in Medical Technology from MTSU. King has received two outstanding public service awards from MTSU and a community foundation award for her many years of work with children with disabilities. She is the founding executive director of the Alliance for Recreational Empowerment which engages people with disabilities in activities that empower them to be active, engaged members of their communities. Dr. King is a member of the National Association of Economic Educators, Tennessee Council for the Social Studies, National Council for the Social Studies, National Business Education Association, and Tennessee Jump$tart Coalition on Financial Literacy where she serves as president.
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Tenpao Lee
Professor Emeritus of Economics at Niagara University
Dr. Tenpao Lee specialized in global economy and supply chain management. He is a professor emeritus at Niagara University and a distinguished professor at Lixin University in Shanghai. Lee has published more than 70 articles in the fields of applied economics.
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Jason Beck
Associate Professor of Economics at Georgia Southern University
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Bob G. Wood, Ph.D.
Professor of Finance at University of South Alabama
Dr. Bob Wood holds a Ph.D. from Louisiana State University, as well as an MBA and a BS from Arkansas State University. Dr. Wood has practical industry experience, having worked with reputable pharmaceutical companies such as Abbott Laboratories and The Upjohn Company.
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Zhigang Feng, Ph.D.
Associate Professor at the Department of Economics, University at Nebraska at Omaha
Zhigang Feng, Ph.D., is an associate professor of economics in the College of Business Administration at UNO. He obtained his Ph.D. in Economics at the University of Miami in 2009. He previously taught at the University of Illinois at Urbana-Champaign, University of Zurich, and Purdue University before joining UNO. Dr. Feng's research focuses on Macroeconomics, Computational Economics, Public Finance, and Labor Economics. His current research is devoted to understanding the impact of US health care policies on the macroeconomy with a focus on labor market issues. He has been invited to present his works at many major universities, central banks, and international conferences.
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Raymond Sfeir, Ph.D.
Director of the A. Gary Anderson Center for Economic Research and Anderson Chair of Economic Analysis at Chapman University
Raymond Sfeir earned his Ph.D. at the University of California, Santa Barbara. He joined the Chapman faculty in 1985 as an Economics and Management Science professor. Dr. Sfeir served as Associate Provost and Vice Chancellor from 1966 to 2014. He teaches microeconomics, applied econometrics, statistics and forecasting. His research interests include operations research, capital asset pricing models and applied economics. Dr. Sfeir conducts the California quarterly survey of purchasing managers and the consumer sentiment survey.
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Ernest Boffy-Ramirez, Ph.D.
Senior Researcher at The University of Denver's Colorado Evaluation and Action Lab
Ernest is a Senior Researcher at the Colorado Evaluation and Action Lab, housed within the University of Denver. He is currently an IZA Institute of Labor Economics Research Fellow. Prior to this, Ernest was an Associate Professor of Economics on the Clinical Teaching Track at the University of Colorado Denver, an Assistant Professor of Economics (CTT), a Visiting Assistant Professor of Economics, and an IZA Research Affiliate. Ernest’s expertise is in the areas of labor economics, workforce analysis, applied econometrics, causal inference, and research design, implementation, and evaluation. His research leverages a variety of large data sets to extract insights spanning a variety of topics, including labor force participation, unemployment, labor mobility and migration, job quality and turnover, minimum wages, higher education, the determinants of earnings inequalities, and the mismatch of supply and demand in the labor market.
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Kelly Manley, Ph.D.
Associate Professor of Economics at the University of North Georgia
Kelly Manley has a Ph.D. in Consumer Economics from the University of Georgia. She has been teaching classes in economics and consumer economics & personal finance for twenty years.
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Craig Seidelson
Associate Professor of Operations and Supply Chain Management at the School of Business, University of Indianapolis
Dr. Craig Seidelson has over 20 years of experience in business management, of which 16 were spent in China building and managing factories. He has worked as a scientist, manager of R&D and chief engineer. He is currently a reviewer for the International Journal of Operations Research and Information Systems as well as a Professor of Operations and Supply Chain Management at the University of Indianapolis, where he teaches logistics, operations, quality management and quantitative methods at the graduate and undergraduate levels. Prof. Seidelson also teaches Manufacturing in China based on his book Operations Management in China. Through his work as Vice President of the Board at the America China Society of Indiana, he helps to bring U.S. and Chinese businesses together. He frequently consults with industry, media as well as government officials on matters relating to Chinese trade and manufacturing. His contributions in China were recognized with an honorary professorship at Changsha University of Science and Technology.
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Nathan Paulus
Director of Content Marketing, MoneyGeek
Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy. Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.
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What Is an Economic Recession?
Key Takeaways
Understand what an economic recession is in a few snippets:
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A recession occurs when there is a decline in economic activity in a region for a certain period of time.
Recessions are characterized by various economic factors, such as gross domestic product (GDP), unemployment rate, consumer confidence, manufacturing rate and inflation.
A recession can be caused by various situations, including an overheating economy, asset bubbles popping or other forms of economic shocks.
Understanding Economic Recessions
An economic recession occurs when economic activity declines for two consecutive quarters. This is typically characterized by a downward trend in the area’s GDP.
However, a decline in GDP for two consecutive quarters does not automatically mean a region is in recession. In the U.S., the National Bureau of Economic Research (NBER), a private, nonprofit and non-partisan organization, is the recognized authority when it comes to declaring a recession. Aside from looking at the GDP, the NBER also analyzes monthly reports for at least 6–18 months on all related components such as income, employment, retail sale and manufacturing to determine if an economy is in recession.
There can be several contributors to a recession. This can include sudden economic shocks, an economy taking on too much debt, loss of consumer confidence, high-interest rates, too much inflation or deflation or asset bubbles. For instance, the COVID-19 virus is an example of an economic shock, as the NBER declared a recession in February 2020. The Dot Com era, on the other hand, is an example of an asset bubble, where prices of investments rose rapidly due to artificially-inflated demand until it “popped” or dissipated and confidence collapsed.
The announcement of an economic recession affects businesses and the average consumer alike. Individuals are more likely to lose their job during a recession, resulting in reduced consumer spending and the inability to pay for expenses. This can lead to business owners struggling to make sales and lenders tightening loan requirements.
The Economic Business Cycle
An economic recession is a normal part of a business cycle, a term used to describe an economy's natural expansion and recession over time. An expansion is a sustained period of rising real GDP, while a recession is a sustained period of declining real GDP.
Business cycles have four phases: expansion, peak, contraction and trough.
- Expansion: An expansion is a period of healthy and sustainable economic growth. This is where employment rates increase, and lenders make it easier to borrow money by giving favorable interest rates. This results in higher spending and demand, leading to increased manufacturing or production rates.
- Peak: A peak is the highest point of a business cycle, where growth hits its maximum rate. This is where economic imbalances, such as asset values rising more rapidly or consumers taking on too much debt.
- Contraction: A contraction, otherwise known as an economic recession, is where growth slows, unemployment increases and retail sales decrease. On average, the contraction or recession phase lasts 11 months.
- Trough: A trough signals an economy’s lowest point, where it will begin to recover. This is then followed by an expansion, and the cycle repeats.
One of the most popular recessions is the Dot Com Bubble, where the economy expanded thanks to the rise of technology and the internet. However, this growth happened too rapidly, leading to fad-based investing, excess venture capital funding for start-ups and the failure of these tech companies to turn a profit. Eventually, the bubble of investments ultimately burst, leaving investors and business owners facing steep losses.
Economic Recession: Indicators and Characteristics
Initially, an economic recession was determined based on the GDP of an economy alone. Now, to determine whether an economy is in recession, the NBER looks at various indicators, such as the real GDP, unemployment rates, consumer confidence, manufacturing rates and inflation rates. Together, these factors paint a clear picture of the economy’s state.
Decline in Real GDP - The real GDP, or real gross domestic product, is the total value of all goods and services produced within a particular period, adjusted for price changes. A decline in real GDP is often accompanied by other shifts, such as a decline in employment or similar.
Rise in Unemployment - A rise in unemployment often occurs during or right before a recession is declared. It indicates that output and demand fall enough to make businesses cut back on labor or reduce their job vacancies. Case in point, the unemployment rate during the Great Depression soared to 25% in 1933 from 3.2% in 1929, while during the Great Recession, unemployment peaked at 9% in June 2009. Even worse, a rise in unemployment can fuel a recession by the snowball effect. More unemployed individuals mean less consumer spending.
Lower Consumer Confidence - Consumer confidence can grant insight into potential retail spending and, in turn, production rates, impacting the declaration of a recession. This can be tracked using the U.S. Index of Consumer Sentiment (ICS). Generally, it can determine a consumer’s pessimism during recessionary periods and confidence during expansionary periods.
Stagnation in Manufacturing and Sales - The manufacturing rate of goods is an essential indicator of an economy’s health and often ties in with consumer confidence. When an economy is expanding healthily and sustainably, consumers are confident and want to make big-ticket purchases. It also leads to businesses feeling good about investing in durable goods. However, during a recession, stagnation or even decline in manufacturing happens when companies and consumers are no longer interested in purchasing durable goods.
The manufacturing and service sectors also have an index indicating whether those sectors are going through an expansion or a contraction, called the Purchase Manager Index (PMI). This shows the view of purchasing managers in the sector, which can provide business owners with a look into current and future business conditions. Generally, the PMI is measured on a scale of 0 to 100, with the higher end of the spectrum indicating an expanding market.
High Inflation - Inflation is the rate of change in the prices of products and services. Moderate inflation can be good for economic progress, as it signals a healthy economy with rising demand for items. However, too much inflation can reduce the purchasing power of consumers, which can reduce retail sales and manufacturing altogether.
Inflation is measured using the consumer price index (CPI), which is the average price of basket goods and services that the average consumer purchases. This takes data from thousands of different products and services from various industries each year, letting you take into account the price change of certain commodities.
For instance, the price index for food items rose to 1.2% in May 2022, a 0.3% increase from April. Similarly, the energy index rose 34.6% between May 2021 and May 2022, with natural gas increasing by 30.2% in the same period — the highest increase since July 2008.
Major Causes Of Recessions
While recessions are a natural part of a business cycle, some events can help push it along. These are unpredictable events such as global economic shocks, financial market problems or a combination of economic factors that create the perfect scenario for a recession.
Overheating
An overheating economy is when supply cannot keep up with demand or the economy is expanding too rapidly, characterized by rising inflation or deflation rates and an unemployment rate below the normal standard for the economy. The Great Recession in 2008 is an example of an overheated economy.
Asset Bubbles
An asset bubble is somewhat similar to an overheating economy in that it features rapid growth — but it is not caused by rising inflation or deflation. Instead, an asset bubble occurs when the price of an asset increases rapidly without justification, such as herd mentality or short-term thinking. Think of the Great Recession of 2008, where the housing market was booming, and more and more individuals took out low-interest loans to purchase a home. Eventually, this asset bubble popped, causing one of the worst economic recessions.
Economic Shocks
An economic shock, or macroeconomic shock, is an unpredictable event that causes large-scale impacts on the economy. These are similar to Black Swan events, which are rare and have severe consequences on an economy, potentially even on a global scale.
Economic shocks can originate from supply and demand issues, particular industries, natural calamities or even shocks from an international market. For instance, the COVID-19 pandemic is an example of an economic shock.
Well-Known Recessions in US History
Since 1854, the U.S. has had a total of 34 recessions, which underscores how recessions are a natural part of any modern economy’s business cycle. While a decline in economic factors often accompanies recessions, it also indicates a new expansion that is different and perhaps more prosperous than the last. Case in point, since the Great Depression in 1929, industries have had many evolutionary changes.
Below are a few examples of the most popular recessions in U.S. history.
The Great Depression (1929-1939)
The Great Depression of 1929 is one of the most severe economic recessions in history, severely impacting the U.S. and global markets.
Several events influenced the recession and its duration. Aside from the U.S. stock market crashing, it was also spurred on by banking panics in the U.S., where banking clients simultaneously attempted to withdraw their cash, leading to a fall in the money supply. International lending also decreased thanks to the Hawley-Smoot Tariff and U.S. banks holding relatively high-interest rates.
Combined, the Great Depression crippled the economy. Between 1929 and 1933, the country’s GDP fell by 50%, nearly one in five banks failed, 25% of the workforce lost their jobs and stocks lost almost 90% of their value. It took a decade for the country’s economic indicators to recover and two decades for the stock market to return to pre-recession levels.
The Great Depression caused the U.S. unemployment rate to rise to a high of 25.6% in May 1933, equating to 15 million unemployed individuals. The stock market crash played a role as those who lost money spent less, lowering demand and impacting manufacturing and sales.
The economy started to recover in 1933, which is also when President Franklin D. Roosevelt took his place in office. To respond to banking panics, Roosevelt declared a four-day “banking holiday,” where he gave banks the time to figure out whether they could stay in business or otherwise be solvent. Roosevelt also launched the New Deal, where the government implemented many relief and recovery programs to employ individuals and stimulate the economy. Additionally, gold inflow from Europe helped spur recovery as, at the time, Europe was in worse economic shape.
The effects of the Great Depression demonstrated the importance of price stability for monetary policies, as fluctuations can cause financial stability and hinder economic growth. Further, banks should have ample reserves to meet withdrawal demands.
2000 Dot Com Bubble
The Dot Com Bubble occurred in the late 1990s and early 2000s due to speculation in dot-com or internet-based firms. This was characterized by the NASDAQ Composite index, which rose exponentially in the early 2000s. It increased from 1,468.86 to 8,083 between January 1995 to February 2000.
Indeed, the formation of internet and tech-based start-up enterprises, combined with the introduction of the World Wide Web, contributed to the Dot Com Bubble's growth as the 1990s ended.
Due to the exhilaration of the new digital age, internet company share values rose faster and higher than their competitors — eventually, the bubble burst. As a result of internet companies being overpriced compared to their fundamental value, many online and technological businesses filed for bankruptcy and faced liquidation.
The 2008 Financial Crisis
The 2008 Financial Crisis, or the Great Recession, is one of the worst recessions next to the Great Depression. Before the Great Recession, the U.S. market experienced an expansion in the housing market. This came with an upsurge in home mortgage borrowing, where lenders offered low-interest rates and high-risk mortgages repackaged into securities.
In turn, the demand for homes increased. U.S. households' mortgage debt increased from 61% of GDP in 1998 to 97% in 2006. This also caused prices to surge nationwide. Eventually, expansion peaked, and the “bubble” burst, leading to an economic recession.
The housing sector was at the center of both the financial crisis and the slowdown in overall economic activity. The U.S. GDP declined by 4.3% from peak to trough, which lasted 18 months — making this the deepest recession since World War II and the longest in history. During the same period, the unemployment rate increased from less than 5% to 10%.
In response, the Federal Reserve provided monetary accommodation and a range of programs to ensure the gradual pace of recovery. For instance, traditional banks required a larger capital and regular stress testing was conducted to help banks and regulators understand market risks.
COVID-19 Recession
Since COVID-19 was picked up in late 2019 in Wuhan, China, countries around the globe turned to lockdowns to prevent the spread. This resulted in major disruptions in all facets of the economy, creating a demand shock, a supply shock and a financial shock. It also heavily impacted industries like travel, hospitality, manufacturing and logistics, causing millions to lose their jobs.
In the U.S. alone, 9.6 million lost their jobs due to business closure during the pandemic. On the other hand, the U.S. GDP fell by 8.9% in the second quarter of 2020, which is the largest single-quarter contraction in 70 years.
Merchandise trade volume from the WTO also paints a picture of how restrictions for COVID-19 wrecked the supply chain and impacted global economies. Case in point, the index was steadily increasing from the first quarter of 2015 but took a steep downturn by 15% in the second quarter of 2020 as lockdowns were implemented.
The U.S. government provided stimulus checks or economic impact payments to stimulate the economy, boosting household incomes and supporting consumer spending. Additionally, lockdowns were eased in the second half of 2020 thanks to infection rates decreasing and economic growth picking up again.
Economic Recession FAQs
A recession generally brings about a sense of foreboding in terms of finances, but understanding the finer details can help you prepare. Review MoneyGeek’s answers to some of the most commonly asked questions about recessions below.
Recessions cause several economic damages, which can make it bad for the economy for the period of time that it persists. This includes increased unemployment rates, lower wages, fewer opportunities for growth and reduced sales and manufacturing. However, a recession is deemed a natural part of the business cycle.
The average recession lasts about 11 months. That said, the duration of an economic recession will depend on many factors, such as the cause, any government policies enacted, the Federal Reserve's response and more.
Since 1854, the U.S. has had 34 recessions, with 19 being the most noteworthy.
A recession is determined using several economic indicators, such as the economy’s gross domestic product (GDP), unemployment rate, manufacturing and retail sales rate, consumer confidence and inflation rate.
Expert Insights on Recessions
Recessions are a natural part of the business cycle, occurring at least once a century, if not more. However, it can still be a confusing concept to understand, which is why MoneyGeek reached out to a few experts for their insight.
- What can the average consumer do to shield themselves, or at the very least, mitigate the financial impact of a recession on their lives?
- Considering recessions are happening every few years, what does that say about the modern US economy?
![Jon Hooks](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1721715829/Hooks_J_0022_crop_min_drecw1_84647a1f70.jpg)
![Craig Seidelson](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1599089526/ckwajywepfxpzrc14bl4.jpg)
![Kelly Manley, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1720510840/kelly_manley_125x168_Kelly_M_539d227b6d.jpg)
![Ernest Boffy-Ramirez, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1710309733/Ernest_Boffy_Ramirez_643f3f665f.jpg)
![Raymond Sfeir, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1719897444/Raymond_Sfeir_aa907070dc.jpg)
![Zhigang Feng, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1710283804/zhigangfengresized_d3dfa5f1d2.jpg)
![Bob G. Wood, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1719898007/Bob_G_Wood_1e7fdc4814.jpg)
![Jason Beck](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1718595226/headshot_beck_400x600_1_995cedc19a.jpg)
![Tenpao Lee](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1639803897/Tenpao_Lee_d3adeef8b4.jpg)
![Dr. Maria Edlin King](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1713836391/King_ece18d17b8.jpg)
![Malcolm Robinson, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1712037995/81a5efd1f6d847c5802bf7829fa40936.jpg)
![William Davis, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1712154231/Davis_William_975ad2b7a9.jpg)
![Prasenjit Ghosh, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1718594852/pghosh_5b77e3f836.jpg)
![Joelle Leclaire, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1709752274/Leclaire_Joelle_Portrait_55e91df0a2.jpg)
![Winnie Lee, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1710118787/Winnie_Lee_d3c8b4f95f.jpg)
![Ryan Lee](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1710318775/Ryan_Lee_99a8198cf2.jpg)
![Jay Walker, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1719553591/Jay_Walker_b55bfdd140.jpg)
![Max Gillman](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1708963079/Max_Gillman_713a57caab.jpg)
![Dr. Linda Loubert](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1707508543/linda_loubert_5c85e19fe7.png)
![Yao "Henry" Jin, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1715756920/Henry_Jin_color_2_1_521908f374.jpg)
![Nick Maeder](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1648064293/Nick_Maeder_dfe6f17c53.jpg)
![Steven Carnovale, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1720242940/Steven_Carnovale_c5c5659d78.jpg)
![Don Uy-Barreta](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1720763268/pic_Don_Uy_Barreta_Don_Uy_Barreta_8462bd05a4.jpg)
![Beverly Mendoza, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1719899941/Beverly_Mendoza_90961535f8.jpg)
![Derek Stimel, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1601048903/gjrmh8gaskkztwxy9xpa.png)
![Brian Jenkins](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1684445977/jenkins_brian_155_1ae29c4220.jpg)
![Aaron Meininger, Ph.D.](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1679178949/ameining_d122febfa9.jpg)
![Brendan Sheehan](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1656955432/Brendan_Sheehan_f0d57bafbb.jpg)
![Jeff Zhou](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1650300452/Jeff_Zhou_a1405a567e.jpg)
![Doug Greene](https://res.cloudinary.com/moneygeek/image/upload/q_auto:eco,c_scale,f_auto,fl_lossy,w_128/v1656954998/Doug_Greene_71f465858e.jpg)
Related Content
When a recession hits, it can be tricky for the average consumer’s finances. Below are a few more resources to help you better understand your financial state and the economy.
- 5 Factors That Could Signal Economic Recovery: Learn how to tell if the economy is improving.
- 5 Best Ways to Build an Emergency Fund: Having cash on hand for unexpected emergencies is essential for financial security. Learn how to build your safety net.
- Understanding Supply: Understand what supply means in the greater context of the economy.
- Understanding Demand: Learn how demand can play a role in the economy’s well-being.
- The Ultimate Guide to Budgeting: Creating a budget is a crucial step in your financial plan. Explore how to create one and why it’s important.
About Nathan Paulus
![Nathan Paulus headshot](https://res.cloudinary.com/moneygeek/image/upload/c_scale,q_auto:eco,f_auto,fl_lossy,w_160/v1660684435/Nathan_Headshot_Nathan_Paulus_1_d018f19d65.jpg)
Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.
Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.
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- National Bureau of Economic Research. "US Business Cycle Expansions and Contractions." Accessed June 27, 2022.
- Stanford News. "The Great Depression demonstrated the indispensable role of government, says Stanford scholar." Accessed June 27, 2022.
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