Sometimes, people spend less money.
This can make it hard to find jobs. It can also make things feel slow. Leaders work hard to help. They try to make things better. Do you know about money?
Sometimes, people stop spending much money. This can cause a recession.
A recession makes the economy slow down. It can be hard to find jobs.
Many things can start this. A big disaster can cause it. People might also stop buying things.
Leaders try to help. They can change how much money is used. They can also change taxes.
An economy can grow again. This is called a recovery. It helps things feel better.
A recession is when the economy slows down for a while. This happens when people and businesses spend much less money.
Many things can cause this. A natural disaster or a pandemic can start it. A financial crisis can also be a cause. When this happens, it can be harder to find a job.
Different places have different rules for a recession. In the United States, experts look at many things. They check income, jobs, and sales. In the United Kingdom and Canada, they look at growth over two quarters. A quarter is three months.
Recessions can have different shapes. Some are V-shaped. This means they are short but sharp. Others are U-shaped or L-shaped. An L-shaped recession stays low for a long time.
If a recession is very long or very bad, it is called a depression. To help, leaders may change rules about money. They might lower interest rates. This makes it easier for people to borrow money and spend it again. This helps the economy grow back.
A recession is a time when economic activity slows down across a large area. This usually happens when people and businesses stop spending as much money as they used to.
Many different things can trigger this sudden drop in spending. A financial crisis or a problem with international trade can cause it. Even natural disasters or a pandemic can lead to a recession. When people spend less, businesses often make less money too. This creates a cycle that affects many different parts of life.
Economists look at many signs to see if a recession is happening. They track things like how much people earn and how many people have jobs. They also look at industrial production and how much is sold in stores.
In the United States, the National Bureau of Economic Research is the main authority. They say a recession starts at a peak of activity and ends at a trough. A trough is the lowest point of the downturn. The group looks at many factors to decide when these dates occur.
Different countries use different rules to define a recession. In the United Kingdom and Canada, it often means negative growth for two quarters. A quarter is a period of three months. The European Union also uses a wide range of signs to check the economy.
This helps leaders understand how deep the problem is. The OECD uses a more specific rule about the output gap. They look at how much the economy is producing over several years. These rules help leaders plan how to help the economy recover.
Recessions do not always look the same. Some are V-shaped, which means they are short but very sharp. These happened in the United States in 1954 and again in 1990.
Other recessions are U-shaped, which means they last for a longer time. Some can even be L-shaped, where the economy stays low for a long period. For example, Thailand saw eight quarters of decline. If a recession is very severe or lasts many years, it is called a depression.
To help, governments often use special policies to boost the economy. They might lower interest rates to make borrowing money easier.
They may also increase government spending or lower taxes. This is meant to encourage people to spend again. Sometimes, people's feelings also play a big role in the economy. An economist named Keynes called this "animal spirits." This refers to how trust and confidence affect how people spend money.
When people feel good, the economy often grows faster.
In economics, a recession is a period of significant decline in economic activity. It is a contraction within the business cycle. This means the economy is shrinking instead of growing. Recessions usually happen when there is a widespread drop in spending. This is often called an adverse demand shock. Many different events can trigger this drop. A financial crisis or a problem with international trade can cause it. An adverse supply shock or the bursting of an economic bubble can also be causes. Even large-scale natural disasters or pandemics can lead to a recession.
There is no single official definition for a recession used by everyone. The International Monetary Fund states there is no official definition. However, different regions use different rules to identify them. In the United States, the National Bureau of Economic Research (NBER) is the main authority. The NBER defines a recession as a significant decline in activity spread across the economy. This decline must last more than a few months. It is usually visible in real Gross Domestic Product (GDP), real income, and employment. The NBER says a recession begins at a peak of activity and ends at a trough. A trough is the lowest point of the economic decline.
Other countries and organizations use different measurements. In the United Kingdom and Canada, a recession is often defined by negative economic growth for two consecutive quarters. A quarter is a three-month period. The European Union uses a similar method to the NBER. They look at GDP alongside many other macroeconomic indicators. This helps them see the depth and breadth of the downturn. The Organisation for Economic Co-operation and Development (OECD) uses a more complex rule. They define a recession as a period of at least two years where the cumulative output gap reaches at least 2% of GDP. The output gap must be at least 1% for at least one year.
Economists also look at the "front end" of a recession to find early warning signs. This is the initial phase where negative trends emerge before a full recession is declared. During this time, indicators like GDP growth and consumer spending start to fall. Falling consumer confidence and reduced business investment are common signs. The labor market may also become sluggish. This means layoffs become more common and wage growth might stop. Some economists use the Sahm Rule to spot this. This rule looks at a rising three-month average unemployment rate. Other signals include rising inflation or an inverted yield curve. An inverted yield curve happens when market expectations suggest much lower growth ahead.
Recessions can take many different shapes. Economists use letters to describe these patterns. A V-shaped recession is short and sharp, followed by a rapid recovery. This happened in the United States in 1954 and 1990–1991. A U-shaped recession is a more prolonged slump. This occurred in the United States during 1974–1975. A W-shaped recession is sometimes called a double-dip recession. This happened in the United States in 1949 and 1980–1982. Some recessions are L-shaped, meaning the economy stays low for a long time. Thailand experienced eight consecutive quarters of decline, which is an L-shaped pattern. If a recession is extremely severe or lasts three to four years, it is called an economic depression.
Psychology plays a major role in how these cycles work. An economist named John Maynard Keynes used the term "animal spirits." This refers to the emotional mindsets and psychological factors that affect economic activity. It also describes the sense of trust people have in each other. If companies expect the economy to slow down, they might stop investing. They might also reduce their number of employees to save money. This can create a self-reinforcing cycle that makes the recession worse. When consumer confidence is low, people do not want to spend money. This lack of spending can lead to even less economic activity.
Governments often try to fix recessions using expansionary macroeconomic policies. These are actions taken to boost economic activity. One common method is to increase the money supply. Governments may also decrease interest rates. Lower interest rates make it cheaper for companies and people to borrow money.
Another method is to increase government spending. Governments can also choose to decrease taxation. These steps are intended to encourage spending and investment. By acting early during the front end of a recession, policymakers hope to mitigate the impact before the downturn deepens.
Where will your curiosity go next?
🖼️ Images & Media (7)
More to explore
✨ What else?
Related topics you might enjoy
🔬 Go deeper
More advanced topics to explore
🪜 Step back
Simpler topics to build understanding
What is Nepedia?
A free, ad-free encyclopedia for children. Every article is written at five reading levels, so the same page works for a five-year-old and a fifteen-year-old — use the level switcher above to see this one change. No account needed to read.