What’s the impact of a recession?

An economic downturn can be devastating for both business and personal lives, and of course, the two are intertwined.

Say a company makes widgets, and starts seeing its sales and profits decline. It will likely decide to make fewer widgets, which means it needs fewer employees running the assembly line and selling the widgets to stores. From there, the effects ripple to many tangential businesses adjacent to the primary widget-maker. If they are manufacturing fewer widgets, they need less machinery, so it affects the machine makers and repair people. Retailers have fewer widgets on their shelves, so their sales decline. And the widget-maker might decide that it doesn’t want to start a second line of widgets after all, so it stops investing in research, design and marketing.

The livelihoods of all those associated employees are then affected, which can shake their confidence. They, in turn, buy less of other companies’ widgets, and all the widget-makers are suddenly in the soup. People are also less inclined to dine out, travel, upgrade their homes, etc. They might even stop paying their bills, causing even further distress for providers of goods and series. It’s easy to see how the cycle feeds on itself. As everyone pulls back, a recession begins.

As this spending decline deepens, the stock market is likely to fall since companies are making and selling fewer widgets. Consumers might lose their jobs, or have their hours or wages reduced. At that point, they can have trouble paying their bills, which leads to credit troubles, and in extreme cases, bankruptcy.

We’re seeing some of these effects already as a result of the coronavirus outbreak. Businesses are shutting down (some temporarily), millions of workers are being laid off from full-time work or losing contract work. So they have less money to spend and may also have trouble covering their bills. The government has been stepping in to try to mitigate the effects with a $2-trillion stimulus plan that would send cash payments to Americans, create a fund to lend to small businesses, and increase (and expand eligibility for) unemployment benefits.

What’s the average length of a recession?

The good news (if we can call it that) is that on average, a recession lasts about 11 months, says the NBER. But they can be shorter and milder, or longer and more severe, as we know from the Great Recession of 2008, or even catastrophic, like the Great Depression of 1929.

But when considering history as a whole, we can assume the next recession will be of the milder and shorter variety.

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