What are the Effects of Recession?

Susan Grindstaff

Most economists suggest that the primary effects of recession are declining stock markets, loss of personal wealth and an overall slowdown of economic growth. From these three main factors, it is suggested that many other effects soon follow. These would typically include rising unemployment, declining real estate values and rising government deficits. Another effect, which some economists say can be a good thing, is a decrease in the rate of inflation.

Unemployment numbers increase during a recession.
Unemployment numbers increase during a recession.

Many experts claim that healthy inflation occurs when wages keep pace with the rising price of various goods and services. When prices continue to go up but are not followed by a rise in wages, this could be one of the causes of a recession. After an economy has entered into a downturn, people typically do not buy as many products and, as a result, prices usually begin to drop. Experts warn, however, that too steep a decline in prices can lead to deflation, which can lead to a situation in which the prices of products are actually less than the cost involved in producing them. When an economy enters into a phase of deflation, it can be difficult to reverse and can have long-lasting effects.

The type of unemployment that occurs during economic recessions is not considered natural unemployment.
The type of unemployment that occurs during economic recessions is not considered natural unemployment.

Statistics seem to indicate that one of the most debilitating effects of recession is the rise of unemployment. On a personal level, loss of employment can have damaging impacts — both psychological and financial — on people's lives. Extended unemployment might have the potential to worsen other effects of recession or even increase the length of time that an economic downturn could last. When people are unemployed, it tends to have a domino effect on economies because it leaves people with less disposable income; therefore, they generally spend less money. Having consumers who are willing to freely spend their money is often considered an essential necessity to reverse the effects of recession.

Some countries offer government programs aimed at lessening the effects of recession. These programs might include unemployment compensation, food and housing supplements as well as programs to retrain unemployed workers. The cost of these programs can often lead to budget deficits within the government because, during a recession, governments typically suffer from a shrinking tax base.

One of the earliest effects of recession is usually a fall in the value of stocks. Similarly, stock markets sometimes regain stability well ahead of other indicators. Though stocks usually begin to recover when companies begin hiring, in some cases, markets can rise ahead of jobs. This type of situation is what economists generally refer to as a jobless recovery.

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