According to the White House and the National Bureau of Economic Research (NBER), a Recession is “a significant decline in economic activity that lasts more than a few months.” This means that when a recession hits, it will impact your finances, especially if it’s long enough. Recessions are typically caused by unexpected economic events, like a sudden drop in GDP (see Explainer: Economic Growth), an oil crisis, or a financial panic (think the stock market crash of 1929 or the COVID-19 pandemic of 2020). They can also occur when unsustainable debt levels cause companies or individuals to stop spending money.
The most common indicator of Recession is a sharp decline in business investment. Other signs include falling consumer spending (followed by slowing GDP growth and declining personal incomes), rising unemployment, and higher-than-normal interest rates (which can make borrowing more expensive). The back end of a Recession usually includes a gradual recovery of economic activity with stabilizing GDP, decreasing unemployment, and increased business investment.
Other causes of Recession are the burst of asset bubbles (like those that happened in housing, tech, and oil markets) and a tightening of government fiscal policy or monetary policy. Tightening of monetary policy is when central banks raise interest rates in order to combat inflation, but that can have the effect of slowing down the economy and even leading to a Recession. In addition, a collapse in an international economy can lead to lower demand for US goods and services which can hurt domestic GDP growth.