What Is A Recession? The Economic Concept Explained And What Happens During One.

What Is A Recession? The Economic Concept Explained And What Happens During One.

Olivia Munson and Paul Davidson, USA TODAY   Mon, October 17, 2022

As prices increase and gross domestic product declines, many people worry about a potential economic downturn, also known as a recession.  Consumer prices rose 8.3% from a year earlier in August while core prices, which exclude volatile food and energy items, climbed 6.3% annually, according to the Labor Department's consumer price index.

Meanwhile, GDP, or the value of all goods and services produced in the U.S., dropped at an annual rate of 1.6% in the first three months of the year and 0.6% in the second three.

Adding to concerns, Jamie Dimon, chief executive of JPMorgan Chase, the largest bank in the U.S., warned at a conference in London on Monday that a “very, very serious” mix of challenges was likely to push both the U.S. and global economies into recession by the middle of next year, CNBC reported. For now, he noted, the U.S. economy was “actually still doing well”  and consumers were likely to be in better shape compared with the 2008 global financial crisis.

If a recession does happen, how will it unfold, and what does it mean for everyday life? Here is what you need to know.

What is a recession?

In simple terms, a recession is "a contraction in economic activity" or "when the economy shrinks," said Sameer Samana, senior global market strategist for the Wells Fargo Investment Institute.

To be more specific, a recession is "a significant decline in economic activity that spreads across the economy and lasts more than a few months," said Michael Pugliese, an economist with Wells Fargo.  In determining whether a recession has occurred, the nonprofit National Bureau of Economic Research doesn't just look at GDP but rather at a variety of indicators such as employment, consumer spending, retail sales and industrial production.

When it comes to defining a recession, it could be a technical recession or a true recession, said Samana.

"The biggest distinction is the severity," he explained. "A technical recession is more of a mathematical downshift. A true recession is a more meaningful contraction across a broader range of categories."

What Happens During A Recession?

During a recession, the economy shrinks as a result of a pullback on individual spending, said Samana.

"Consumption, consumer spending makes up about 70% of the U.S. economy," he said, explaining that during a recession, the cutback in spending "then feeds into overall demand for services."

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