What Causes an Economic Recession? A Finance Guide

What Causes an Economic Recession? A Finance Guide

Economic recessions leave people frantic, scared, and confused about how to move forward with their lives. A recession tends to leave those at the bottom with the largest burden, and marginally affects most of those at the top. 

That said, how do you know when a recession is coming? What causes economic recessions, and what can we learn from historic economic recessions?

We’re going to take a look at these questions today, giving you some insight into what a recession is and how it comes to pass. Let’s get started.

What Is an Economic Recession?

The textbook definition of a recession is “two consecutive quarters of decline in a country’s gross domestic product.” That is to say, around six months of businesses in decline and a rise in unemployment. 

That definition doesn’t do as much to account for the full scope of a recession, though. The National Bureau of Economic Research calls a recession “a significant decline in economic activity spread across the economy,” and they go on to mention that it’s visible in the areas of production, income, employment, and more. 

It’s also worth noting that a recession technically begins the moment that an economy descends from its peak. It ends when it hits the bottom of the recession. What causes it, though? 

Broad-Scale Causes

There are a lot of reasons that a recession might occur. In most cases, there’s a combination of factors that contribute to the onset of economic decline. 

That said, those factors tend to connect to a fundamental part of the economy. One common culprit is the prices of oil and energy. If there’s a scarcity of oil or oil companies boost prices, that shift has implications on the entirety of the U.S. economy. 

That causes millions of respective prices to increase, impacts the value of the dollar, and changes the way that people spend their money. Businesses make less money and they can’t employ as many people, so fewer people spend their money. 

As you see, a chain reaction occurs when some fundamental issue takes place. In a globalized world, it’s also important to note that each major economy props the others up. 

An economic depression in Japan, for example, would put a lot of pressure on the American economy. American recessions ripple across the entire globe. 

Nuanced Causes

While the visible contributors to recessions seem blatant, there are underworkings that make a big difference. For example, a government’s ability to settle political conflict plays a big part in economic health. 

James Robinson discusses soft factors that contribute to economic growth, shining a light on ways that countries can avoid recessions. The behavior and cultural attitudes of businesses and nations also play a part in whether things pan out for the better. 

Wondering How to Survive an Economic Recession?

Hopefully, you have a better idea of the factors in an economic recession after reading the information above. There’s more to learn, though, as markets change all of the time and different elements hold new importance. 

We’re here to help you sift through it and explore ways that you can maintain your standard of living through recessions. Explore our site for more insight into financial dealings, lifestyle improvements, health, and more.