A:

A recession has a domino effect, where increased unemployment leads to less growth and a drop in consumer spending, affecting businesses, which lay off workers due to losses. A recession occurs when there are two or more consecutive quarters of negative gross domestic product (GDP) growth. In other words, economic growth slows during a recession. Attributes of an economy experiencing a period of recession include a fall in sales and revenues of corporations, a fall in stock prices, falling incomes and a high unemployment rate.

When an economy is facing recession, business sales and revenues decrease, which cause businesses to stop expanding. When demand is not high enough, businesses start to report losses and first try to reduce their costs by lowering wages or keeping wages where they are and ceasing to hire new workers, which increases the unemployment rate. A decrease in the GDP causes firms that aren't recession-proof to report losses and can cause some companies to go bankrupt, resulting in massive layoffs that also increase unemployment.

Recession effects can snowball and worsen the situation. When there are massive layoffs and no jobs being created, consumers tend to save money, tightening the money supply. When there is a tightened money supply, unemployed workers and workers with low wages tend to save more and spend less, decreasing the demand for goods and services and decreasing consumer spending. This drop in demand lowers the growth rate of companies and the economy, which, in turn, leads to greater losses in non-recession-proof business and higher unemployment. (For related reading, see: Types of Unemployment.)

RELATED FAQS
  1. What causes a recession?

    A recession is a significant decline in economic activity lasting more than a few months, normally visible in real GDP, income ... Read Answer >>
  2. What is the difference between structural unemployment and cyclical unemployment?

    Learn more about about the differences between structural and cyclical unemployment and when cyclical unemployment becomes ... Read Answer >>
  3. What's the best investing strategy to have during a recession?

    Figure out how to take advantage of recessions, what assets to buy and which ones to avoid. Recessions are where some great ... Read Answer >>
  4. What's the difference between cyclical unemployment and seasonal unemployment?

    Learn about the key differences between cyclical and seasonal unemployment. Read about distinguishing features of each of ... Read Answer >>
  5. What is the difference between frictional unemployment and structural unemployment?

    Learn about structural unemployment and frictional unemployment, the differences between the two and their main characteristics. Read Answer >>
  6. What can policymakers do to decrease cyclical unemployment?

    Learn about the tools available to policymakers to reduce cyclical unemployment, and find out more about the role of expansionary ... Read Answer >>
Related Articles
  1. Insights

    Recessions and Depressions Aren't So Bad

    Downturns like depressions and recessions are a natural part of the economic cycle and can actually provide some benefits.
  2. Insights

    The Cost of Unemployment to the Economy

    Unemployment carries many costs, both obvious and hidden, for an economy.
  3. Insights

    Will Your Net Worth Be Affected By A Recession?

    Here's a look at how a potential recession could impact your net worth in a negative way.
  4. Managing Wealth

    Top 6 Recession Investing Myths

    Find out the truth about recessions and how they impact your portfolio.
  5. Insights

    The Downside of Low Unemployment

    Yes, the unemployment rate can be too low.
  6. Investing

    How inflation and unemployment are related

    How can inflation affect unemployment, and vice versa? Here, we examine the relationship between wage inflation, consumer prices, and unemployment.
  7. Insights

    6 Factors That Point to Global Recession in 2016

    We may be on the verge of another global recession.
  8. Financial Advisor

    How Labor Force Participation Rate Affects U.S. Unemployment

    While a falling unemployment rate sounds like a good thing, it can actually be indicative of people leaving the labor force because they can't find a job.
  9. Insights

    Will You See Higher Wages In 2015?

    It's been a few years into the economic recovery from the Great Recession, and the employment picture has been rocky.
RELATED TERMS
  1. Recession

    A recession is a significant decline in activity across the economy ...
  2. Growth Recession

    Growth recession describes an economy that is growing at such ...
  3. Structural Unemployment

    Structural unemployment is a longer-lasting form of unemployment ...
  4. Recession Rich

    Recession rich refers to a person who manages to do well financially, ...
  5. Recession Proof

    Recession proof is a term used to describe an asset, company, ...
  6. Global Recession

    A global recession is an extended period of economic decline ...
Trading Center