Definition of the week

Definition of the week:

A recession is a prolonged period of time when a nation's economy is slowing down, or contracting. Such a slow-down is characterized by a number of different trends, including:

* People buying less stuff
* Decrease in factory production
* Growing unemployment
* Slump in personal income
* An unhealthy stock market

By the conventional definition, this slow-down has to continue for at least six months to be considered a recession.

Detailed Explanation:

What goes up...

In a growing economy, consumer demand is increasing, overall, more than it is decreasing. Since there is increasing demand, producers want to increase supply. To do this, producers have to increase their consumption of other goods and services, including labor. This means there is greater demand for labor, so the labor pool, on the whole, can raise the price of their product (in other words, people can get paid more for their work).

Working people with higher incomes have more money to spend on other products, which increases demand even more. If demand is high enough, the price of some things goes up. For example, if there are more travelers than there are seats on airplanes, airlines can raise their prices to decrease demand (this could lead to high inflation if it happened across the board, but in the past decade the U.S. economy has shown the ability to grow steadily while keeping inflation under control). In a growing economy, some consumers and producers will not do well, but most will, so the general feeling about the economy is good.


In such an economy, a lot of consumers tend to make investments: They buy things, such as stock in a company, that they plan to sell at a later date. They know that if the economy keeps going the way it has been, their investments will increase in value. These consumers figure they will make money just by holding onto the product for a while.

...must come down!

History has proven that an economy will not keep expanding indefinitely -- eventually it will contract for a while. A prolonged period of contraction is known as a recession. If the recession lasts long enough, and is particularly severe, it is known as a depression. In the next section, we'll find out what happens in this sort of economy.

There are all kinds of things that can change the course of the economy, just as there all kinds of things that can change the demand for a particular product. In some cases, a recession might be kicked off by over-production -- a situation in which the supply exceeds the nation's ability to consume.

One factor that generally plays a role in a recession, whether or not it is the cause, is the confidence level of the millions of consumers and producers. If consumers stop feeling confident about their job security or the value of their investments, they won't buy as much stuff. In the current recession, a lot of people who have been laid off are spending as little as possible, and many people who fear they may be laid off are also saving their money.


Just as in an expanding economy, things tend to snowball in a contracting economy. There are thousands of different elements in this downward spiral; you can see the snowballing effect in any number of specific situations.