Common Causes of an Economic Recession

The same causes of economic recession have appeared again and again, whether it involves recessions in the 70s, the 80s or right now. When you see these indicators, you can be sure that a recession is either happening or on its way:

Supply and demand are out of whack. In many cases, there's too much supply and not enough demand. Consumers simply aren't keeping up with buying all the goods and services that have flooded the market. As a result, profits for companies decline, and investors become nervous.

Inflation happens. Prices of goods and services go up, and the dollar doesn't go as far as it used to, which prompts people to save rather than spend. A major sign of a financial crisis is when the price of basic goods, like food and energy, starts to rise.

Stocks are overvalued. When the stock market goes up, more and more people jump in, driving the price of stocks even higher. A price of a stock may not match what the company is actually worth, and the price is going to have to go down, causing investors to lose money.

Companies shrink. Businesses either stop hiring or start firing. Since they aren't selling as much or their businesses were overvalued, they must resort to these measures to show investors that they are making a profit and stay alive during the recession.

Decline in consumer confidence. A market recession isn't all about numbers. Emotions play a huge role. If consumers don't feel secure and are worried about their jobs, they won't spend, and they won't buy stocks. In fact, they may get scared and sell their stocks, and selling stocks all at once sends the market into a tailspin.

Lending stops. Banks are just like an ordinary investor. They don't want to take risks if they don't see a potential for a good return. When times are tough, they will be conservative, and they will turn down opportunities that they might have accepted during a high point in the business cycle.

Current regulations aren't working. Financial regulations change depending on the political climate and prevailing business philosophies. One side may argue that over-regulating restricts investment and innovation. The other side may argue that under-regulation encourages exploitation of consumers and shady financial dealings. Either way, if the regulations do not correspond with the needs of the economy and the electorate, then the economy is at risk.

Unfortunately, you can't keep a recession from happening. Supply outpacing demand and overvalued stocks are simply a part of the business cycle. However, by recognizing the signs, you can better prepare yourself, either by reining in your spending, waiting to invest or boosting your job skills.

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