A recession means a period of negative economic growth. This means there is a fall in National Output.
The official definition of a recession is when there is negative economic growth for two consecutive quarters. (i.e. for 6 months)
However, in practise people may talk about recession, even when the economy is growing very slowly. In economics we sometimes refer to this as a growth recession. This is because when economic growth is very low it means that we usually see many of the common features of recession.
In a recession the following usually occurs.
1. Lower Incomes
2. Rising Unemployment
3. Lower inflation
4. Higher Government Borrowing
5. Fall in sales of houses.
6. Fall in Business and consumer confidence
7. More spare capacity in the economy.
Note, the US economy is still someway off recession. Economic Growth is less than 2%, but, there is no immediate danger of leading to negative growth.
The problem in the US is that:
1. The Housing Market is in decline. In many cities house prices are falling.
2. The Stock market is falling, Partly due to the sub prime mortgage lending problems.
3. There are fundamental imbalances in the US economy
- low savings ratio,
- high debt levels,
- trade deficit and
- government fiscal deficit.
- Weakness of the dollar (related to trade deficit)
People are concerned that the combination of falling house prices, falling share prices and rising interest rates are likely to cause a recession.
If people fear a recession is about to occur, this fear can often make it happen. If you feel there may be a recession in the future then you will cut back on spending and this can cause a further fall in AD.