How Recessions Work

Money Makes the World Go Round

In the Great Depression of the 1930s and '40s, laid-off U.S. workers lined up daily at employment agencies.
Photo courtesy NARA

­A recession is a prolonged period of time when a nation's economy is slowing down, or contracting. Such a slow-down is characterized by a number of different trends, including:

By the conventional definition, this slow-down has to continue for at least six months to be considered a recession.


This definition really raises more questions than it answers. What does it mean for the economy to slow down? Why does this happen? How are all these factors related? And what exactly is "the economy"?

People talk about the U.S. economy as an independent entity, but it is actually the result of millions of people's actions. Economists use all kinds of esoteric terms to describe the connection between people's actions and the economy as a whole. But you can understand the basic idea of this connection by looking at only a few basic concepts: producers, consumers, markets, supply and demand.