A recession is a contraction in economic activity that causes a decrease in incomes and spending by households, businesses and governments. It’s a natural part of the business cycle and usually happens after a shock, such as a natural disaster, financial crisis or political unrest.
The economy usually emerges from a recession after six to seven months, though the gap between contraction and recovery can be much longer than that. Sometimes there are two recessions very close together, called a double-dip recession. If you’re concerned that a recession is on the way, there are some key indicators to watch.
For example, mass layoffs in certain industries may signal that a recession is coming. Also, an inverted yield curve—when interest rates on long-term and short-term government debt are the same—has a reliable record of warning about upcoming downturns.
Consumer confidence is another key indicator that can point to a pending downturn. As people’s expectations of the future weaken, they become more cautious about buying goods and services, which cuts down on economic activity. This can lead to companies cutting back on expenses, including advertising and training. This in turn can slow hiring, which further slows the economy.
A downturn can also cause higher inflation, which reduces the purchasing power of consumers and makes it harder for businesses to grow. This can be a result of higher oil prices, for instance, or the result of higher taxes, especially when they’re imposed by a federal government trying to rein in spending.