Defining "Recession"

Some people may hear the word recession being tossed around very often and wonder what exactly is a recession? One immediate problem in trying to determine the identity of recession is that there has never been an authoritative, stable, reliable definition nor quantification for the word. It is, simply speaking, a long-term overall decline in the economy.

However, one helpful rule of thumb is to think of a recession as a downturn that is not as severe as a depression, which is useful, because a depression does have a strict definition. A nation is officially experiencing a depression if its Gross Domestic Product (GDP) drops by 10%. GDP is just the total market value of all goods and services produced within a country's borders in a year. So, if the GDP decreases, but not quite by 10%, it can probably safely be called a recession. But what factors most effectively predict, indicate, and overcome this downturn?

Stock Market

When asking what defines a recession, one must take into account the stock market, which is an exchange of representative capital shares in large corporations in hopes of being able to trade them for later gains. When businesses are doing well, and making wise investments, their stock increases, making them a viable entity for their shareholders. The economy thrives when businesses are actively and capitalistically trading, producing innovative products, providing quality services and adhering to basic supply and demand to determine ideal prices for consumers. However, when the market drops across the DOW, NASDAQ and other primary indicators, this means something is amiss with the corporations that have gone public. A long, deep fall in the market is bad news.

Unemployment

Obviously, a country's market is strongest when its inhabitants are all working, thus making money and spending it for others, which encourages further trade, innovation and prosperity. However, when a large company fails, its workers are now without income, and thus purchase less, threatening the viability of other local businesses, which can affect more jobs, and so on and so forth, which can have a catastrophic chain reaction. For this reason, rampant joblessness can definitely be a recession indicator, and national unemployment rates can regularly be read in the "Wall Street Journal," or easily found on any search engine.

Home Prices

Because houses are usually the most expensive thing someone owns, and their most significant investment, home prices speak a lot as to the health of the economy. High home prices means that lots of people are working, so they have money in their pockets, and entrepreneurs are taking advantage by using good ideas to make lots of money to afford nice houses. But, on the other hand, a lowering in home prices means that people are not doing so well, and cannot afford the same pricey homes, so the market is forced to drop to meet demand. When Americans got into a credit crunch, took on too much debt, and suddenly could not pay on their big housing loans, the housing market fell into itself, definitely becoming a recession signal.