Did you know that there have been 19 major recessions in US history? They’re natural and inevitable, but that doesn’t make them any less painful.
The average person may find it difficult to pay their bills and have to take on several jobs to make ends meet. Those who are laid off lose access to workplace perks such as health and dental insurance.
The question is, what are the causes of a recession? In truth, there are several sources to blame. When people lose confidence in the market, they’re less likely to spend money.
Oversupply and unexpected events such as the pandemic can also put a wrench in the well-oiled machine that is the economy. That’s only the tip of the iceberg. Keep reading to learn more.
What Is a Recession?
So, first things first. What is a recession? It’s defined as a sudden economic turndown that lasts for two quarters or more.
Between the 60s and mid-2000s, there were over 100 recessions. They’ve become less frequent as the years have gone on, and they don’t last for nearly as long as they used to.
That might be because a supply chain can help navigate a recession and pull small businesses through. You can read the full article here.
Loss of Confidence
When the general populous feels worried about the economy, they’re going to spend less money. This way, they have some cushion if worse comes to worst.
When people aren’t buying, companies aren’t going to waste their funds on advertising. Businesses will halt their hiring process because they’re not making enough sales to warrant keeping a fully staffed store.
Manufacturers will stop making as many products and slow down their hiring as well.
This downward spiral will continue until the central bank and government take measures to generate confidence in the state of the market.
Monetary Policy
A monetary policy is an action taken by the central bank that plays around with the money supply. Interest rates are also stimulated to help impact the economy.
Problems occur when the monetary policy is altered too much. If interest rates shoot up, people are going to be less likely to borrow money, which means they’re not going to spend as much.
If spending slows down to a certain point, you’ll begin noticing the common signs of a recession.
Oversupply
During an economic boom, when people don’t need recession help, and things are going well, companies will order extra stock to meet demand.
The problem is that there will come a time when demand peaks and then shoots down at a rapid pace. When this happens, companies are now sitting on a bunch of stock that they don’t have any use for.
To combat the decline, manufacturers will start producing less and downsizing their businesses. Over time, an economic recession will begin, and customers won’t make enough money to help businesses clear out their warehouses.
Unexpected Events
On January 10th, 2020, COVID-19 began. The impact that it had on the economy is still felt years later.
Companies had to close down for months. Many couldn’t afford to reopen their doors after the lockdown ended. This caused the unemployment rate to increase to an all-time high.
People began to fall behind on their rent and utility payments. Without government help, many would have been completely homeless.
Unexpected events such as COVID-19 and natural disasters are one of the most devastating and sudden recession causes. It’s almost impossible to prepare for them ahead of time.
Fiscal Policy
A fiscal policy has to do with government spending and taxes. For example, if the government decides to cut spending, it can create a huge demand for goods and services, which can lead to a recession.
If the government raises taxes, people won’t have a lot of disposable income to play around with. Consumers aren’t going to race to the stores to buy laptops and cars if they owe the IRS.
High-Interest Rates
As stated above, consumers will be hesitant to borrow money while interest rates are at an all-time high. It makes it difficult for the average person to take out a loan to put a downpayment on a home.
Aspiring entrepreneurs will wait to open their businesses until interest rates go back down.
Deflation
Deflation occurs when demand for a product takes a massive drop. When demand halts, business owners slash their prices in half in an attempt to bring in buyers.
Consumers will wait to find out how far companies will drop their prices before they buy the product.
While buyers are waiting, the economy will slow down. The inactivity will lead to unemployment, which will lead to a recession.
Uncertainty
When business owners aren’t sure which way the economy is going to swing, they’ll be hesitant to make any big investment decisions. Consumer activity is unpredictable during times of uncertainty, which makes every business decision a risk.
Many companies will hold off and wait to see what happens. Again, uncertainty also impacts businesses on a consumer level. Customers will avoid making big purchase decisions because they’re not confident in the economy.
Understanding the Common Causes of a Recession
There are so many causes of a recession. A single government policy or natural disaster can throw a wrench into the entire economy.
Sometimes an economic crash will follow a boom when the demand for a product plummets. People are also hesitant to spend money when they don’t have confidence in the economy.
For more information on the economy and recession, visit the News section of our blog.
