What it is:
How it works/Example:
Let's assume that there has been a significant decline in industrial production, employment, and wholesale or retail trade. These things may cause the gross domestic product, or GDP, to decline for a three-month period (a quarter). If the situation continues in the next quarter, most economists declare that the is in a .
The effects of a are far-reaching. Employment levels fall, discretionary income falls, and overall consumer spending falls, leading to tough times for most companies, which in turn lay off more workers and reduce overall consumer spending further. Few businesses expand and few consumers buy, which lowers the demand for loans. Interest rates usually fall as a result during a .
During an economic recovery, the declines slow and then turn to increases. The unemployment rate is gradually reduced as companies begin hiring again. A decreasing unemployment rate leads to an increase in consumer confidence and spending, and the economy begins expanding again.
Why it matters:
Recessions are a normal part of the business cycle, and so are economic recoveries. Government fiscal and monetary policies often play key roles in making sure recessions do not go on for long and recoveries don't get so out of hand that they spark runaway inflation. These policies involve increasing or decreasing government spending on entitlement programs and public works projects that create jobs, and they may involve changing bank reserve requirements, the interest rate at which the Federal Reserve lends to banks, or the purchase or of Treasury securities.
An economic recovery is the fuel for a bull market, which usually presents a multitude of moneymaking opportunities for investors because prices are generally rising across the board. During recessions, analysts spend thousands of hours trying to mathematically determine what trigger a recovery and how long it last. Technical analysis is especially prevalent in this effort, although less sophisticated indicators also provide fodder for such predictions. This in turn can sometimes lead to speculation that a recovery (and a bull market) is just around the corner, which can then become a self-fulfilling prophecy.