What is a recession, and when was the last one in the United States?

In a recent Fox News interview with U.S. President Donald Trump, he was asked if he expects a recession this year, which he did not rule out. “I hate to predict things like that,” he stated. “There’s a period of transition because what we’re doing is very big,” by which he referred to recent actions his administration has taken, particularly the implementation of tariffs on other countries and the financial actions of the Department of Government Efficiency (DOGE) under the leadership of entrepreneur Elon Musk.

What is a recession?

A recession is a significant decline in economic activity affecting various sectors of the economy. It is generally recognized when a country’s gross domestic product (GDP) declines for two consecutive quarters. However, a recession is not limited to GDP. Economists look at a wider range of indicators, such as employment levels, industrial production, and consumer spending, to assess the health of the economy. Recessions are a natural part of the business cycle, but they can have serious effects on businesses, individuals, and governments, affecting everything from employment to stock markets.

What causes a recession?

Recessions are usually caused by multiple factors that can be classified into economic, financial, and psychological causes:

• Economic factors: A recession can be triggered by structural changes in industries or markets, such as changes in consumer preferences, technological advances, or disruptions in global supply chains. For example, the rise of e-commerce caused traditional retail sectors to decline, affecting employment and investment in physical stores. In addition, significant increases in the cost of essential commodities, such as oil, can raise production costs across industries, reducing overall economic output.
• Financial factors: Recessions can also be caused by financial imbalances. For example, excessive corporate or consumer indebtedness can lead to unsustainable debt levels, causing financial instability. When asset bubbles (such as housing markets or stock prices) burst, there can be a sudden collapse in asset values, severely disrupting the financial system. A credit crunch often follows, leading to a reduction in business and consumer spending, further exacerbating the recession.
• Psychological factors: The psychology of investors and consumers plays a key role in recession dynamics. Excessive optimism in times of economic prosperity can fuel risky financial behavior and lead to over-leveraged markets. When confidence wanes — for example, when consumers stop spending out of fear for the future — the economy can experience a sharp contraction. Investor panic or a sudden loss of confidence can lead to rapid sell-offs in financial markets, worsening the recession.

How are recessions identified?

The National Bureau of Economic Research (NBER), the U.S. authority on business cycle dates, officially designates the beginning and end of recessions. The NBER uses several economic indicators to make this determination:

• Nonfarm employment trends: Large-scale job losses and employment declines are key signs of an economic recession.
• Industrial production and output levels: A drop in industrial production — such as manufacturing, mining, and utilities — can indicate a contraction in the economy.
• Consumer spending and retail sales data: Declines in consumer spending and retail sales are often early indicators of a slowdown in economic activity.
• Business investment and inventory changes: Reduced business investment and changes in inventory levels may suggest that businesses are anticipating lower future demand.
• GDP growth patterns: Continued contractions in GDP are one of the leading indicators of recession, as GDP measures a country’s total economic output.

What was the last recession in the US?

The most recent recession in the United States occurred in early 2020, triggered by the Covid pandemic. This recession was unique because of its sudden onset and the far-reaching measures taken to curb the spread of the virus.

The U.S. economy suffered a drastic downturn as widespread closures, restrictions, and quarantines were implemented, bringing much of the country’s economic activity to a halt. Unemployment experienced an unprecedented rise, reaching 14.7% in April 2020, the highest level since the Great Depression. This jump reflected the direct impact of the isolation measures and the disruption of the economy.

In response, the U.S. government intervened through fiscal stimulus measures. Direct stimulus payments, expanded unemployment benefits and small business assistance programs were implemented. In addition, the Federal Reserve lowered interest rates and adopted monetary policies aimed at stabilizing financial markets.

Despite the initial severe contraction, the economy began to recover relatively quickly, supported by government intervention and the gradual easing of restrictions as the distribution of vaccines progressed.

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