What is a recession, and how does it affect the economy?

A recession is a prolonged period of economic decline, often marked by falling GDP, employment, and other key indicators. While traditionally defined as two consecutive quarters of GDP contraction, the National Bureau of Economic Research (NBER) officially determines recessions based on a broader analysis of economic activity.

Recessions are typically caused by factors such as declining consumer confidence, prolonged high interest rates, financial instability, and external shocks like geopolitical events or pandemics. Key indicators like an inverted yield curve and the Sahm Rule are closely monitored by economists to predict recessions.

Fiscal and monetary policies, including government spending, tax cuts, and Federal Reserve actions like interest rate cuts and quantitative easing, are used to mitigate recessions and promote recovery. While recessions often lead to market volatility, historical data shows that markets can recover strongly post-recession, offering potential opportunities for long-term investors.

Diversified portfolios and disciplined investment strategies can help manage risk during economic downturns.