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What is a recession?

Recession - a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

A recession is a significant decline in economic activity, lasting more than a few months. There's a drop in the following five economic indicators: real gross domestic product income, employment, manufacturing, and retail sales.

The first sign of an impending recession occurs in one of the leading economic indicators such as manufacturing jobs. Manufacturers receive large orders months in advance which is measured by the durable goods order report. If that declines over time, so will factory jobs. When manufacturers stop hiring, it means other sectors of the economy will slow.

A fall-off in consumer demand is normally the culprit behind slowing growth. As sales drop off, businesses stop expanding. Soon afterward they stop hiring new workers. By this time, the recession is underway.

Recessions cause standard monetary and fiscal effects – credit availability tightens, and short-term interest rates tend to fall. As businesses seek to cut costs, unemployment rates increase. That, in turn, reduces consumption rates, which causes inflation rates to go down. Lower prices reduce corporate profits, which triggers more job cuts and creates a vicious cycle of an economic slowdown.

National governments often intervene to bail out key businesses that face potential failure or structurally important financial institutions such as large banks. Some companies with foresight and planning understand the implicit opportunity created by the lower cost of capital as interest rates and prices fall and are actually able to take advantage of a recessionary period. A larger pool of unemployed workers enables employers to recruit more qualified candidates.

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