How Does Recession Affect the Economy?

Business Dictionary defines a recession as a period of contraction in the gross domestic product (GDP) for six months or longer, during which retail sales fall, wages stagnate and unemployment rises. EPI adds that recessions also impact education, job opportunities and the formation of new businesses.

Towers Watson indicates that recessions are generally marked by mass layoffs as companies struggle to retain all their staff. The workers who remain are less likely to voluntarily quit their jobs, and it is harder for young workers entering the workforce to find jobs.

Big businesses experience a decline in sales revenues and start to cut costs, including the purchase of new equipment, research and development, and advertising. These efforts to cut costs, in turn, affect other businesses, according to Investopedia.

During a recession, companies may see a decline in their stock prices and shareholders' dividends. As a result of declining profits, companies become less able to repay their debts on time, which can lead to their credit ratings being damaged. Companies that are consistently unable to service their debts declare bankruptcy and go out of business. Smaller businesses are especially susceptible to bankruptcy during recessions, since they typically don't have large cash reserves, notes Investopedia.