What Causes a Recession?

Learn the key factors behind an economic slowdown.

Selena Maranjian
Selena Maranjian
Nov 8, 2006 at 12:00AM

With energy prices skyrocketing and inflation looming, some Fools might be wondering whether a recession is around the corner. Others might be wondering . well, what exactly is a recession, anyway?

By the general definition, you've got a recession on your hands when a nation's economic output has been falling for two or more quarters. Recessions are often accompanied by rising unemployment and decreasing consumer spending.

To discover what causes them, I entered the term "cause recession" into my search engine of choice. Here's what I got back:

  • "Fed mistake could cause recession."

  • "Increase in oil prices can cause recession."

  • "Stock market fall unlikely to cause recession."

  • "Analysts say stock sell-off may cool the economy and cause recession."

  • "Households saving more will cause recession."

  • "Overspending and high taxes could cause recession."

  • "Asian contagion could cause U.S. recession."

  • "Corporate fraud and investor pessimism don't cause recessions by themselves..."

  • "Hard brushing can cause gum recession."

Hmm . well, that last item appears to be dental in nature, not economic. But otherwise, the tidbits above should demonstrate that a wide variety of things are often linked to recessions. Causes might be internal (e.g., interest rate changes) or external (e.g., wars, financial crises elsewhere in the world, etc.). Economists vary on their views of what causes recessions. At any given time, you'll likely find some people who think we're heading toward a recession, and some people who think we're moving away from one. When we're in a recession, some economists will think that we're about to turn the corner, while others see continued stagnation.

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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.