What Is an Economic Downturn?
Regional economies inevitably go through cycles, and an economic downturn represents one such period. It occurs when productivity in a nation is declining rather than growing. Some of the characteristics of an economic downturn could be greater unemployment, higher inflation, and a depressed stock market. Investors who are saving for retirement or to finance an education can lose a large portion of an investment portfolio throughout a financial downturn as stock prices drop. It may become especially difficult for borrowers to obtain financing during a down cycle in the economy and the value of real estate could become compromised.
An economic downturn could formally occur when an economy enters into a recessionary period or when signs of economic contraction only begin to emerge. In an official recession, an economy experiences contraction for two consecutive quarters as measured by an economic indicator known as gross domestic product (GDP). A recession is an indication that manufacturing and other business activity is slowing, which is not conducive to higher profits. These conditions can have damaging affects on a nation's employment and income levels, which in turn hurts businesses because consumer spending typically slows.
One of the signs that an economic downturn is looming is when stock prices in the financial markets lose excessive ground. Investors demonstrate their confidence in the stock market by purchasing or selling equity shares. When there is continuous selling pressure and the major stock market barometers shed significant ground, it indicates that consumers are lacking confidence in the conditions in which businesses operate. Selling activity suggests that corporate profits may be threatened in some way and investors are not willing to maintain exposure to stocks. Investors might look to signs, such as unemployment figures, consumer spending data, or GDP to decide whether or not an economic downturn is imminent.
Other signs of a declining economy include depressed housing prices in the residential and business real estate markets. This can have an affect on the pace at which real estate is bought and sold. Homeowners could stand to lose money on property investments when prices are depressed and this could cause enormous problems in the real estate market. An economic downturn also slows the pace of real estate development, which has an affect on the number of construction and contracting jobs that are available. A severe slowdown in the housing market has the potential to actually create an economic downturn, which illustrates the influence that a country's real estate market has on the economy.
@hamje32 - Yeah, the same is true for unemployment data too. There are actually several sets of figures at the website for the Bureau of Labor Statistics. There is the official unemployment figure that they release to the media, and another set of figures that measure “underemployment” – which means people who are discouraged and have stopped looking for work.
It’s not uncommon to find that the underemployment figure is nearly twice as high as the official, publicized unemployment figure.
They make the underemployment information available at their website like I said, but for obvious reasons it’s not highly publicized. The published numbers are demoralizing enough.
@SkyWhisperer - Economists use a bunch of different numbers to indicate whether we are in a recession or not. They look at GDP and consumer spending and stuff like that.
However, I’d like to point out that these numbers can be tricky. For example, GDP not only includes private sector spending but government spending. It’s quite possible that the government can pour billions of dollars into the economy through stimulus spending, thus inflating the GDP number.
Looking at the GDP number alone you would falsely conclude that the economy is robust, when private sector spending may still be flat or weak. So if you really want to understand economic downturn statistics you have to learn to drill down deep into the data.
@David09 - I lived in a part of the country that was able to endure the real estate crisis. Our home prices held steady, not because we were immune to the pressures of the economic downturn, but because we never had a boom in the housing market in our area.
Maybe the lesson to learn is to avoid booms or bubbles, whether they are in real estate or stock market or whatever. Once you see a bubble forming, get out. All bubbles burst eventually.
They said that the recession of 2009 was the worst economic downturn since the Great Depression. For the most part, I believe it’s true.
People like to cite facts and figures to bolster this argument; however the only thing that matters is when it personally hits you. I was laid off during that time period and suddenly I became a statistic.
Fortunately I was able to rebound within a few months, but during the period of unemployment I still felt the same pain experienced by other unemployed workers who were wondering about the future. It’s certainly no fun.
What I can share from experience is to always have an escape plan for your financial future, in the same way that you have an escape plan for your house in case of fire. In other words, set aside enough money in savings so that you can weather the storm. Boom cycles don’t last forever, and neither do bust cycles.
An economic downturn eventually seems to affect everybody in one way or another. When you have a significant downturn in the world economy, that has far reaching effects all over the world.
Even though there is no way to escape an economic downturn, you do have some control how you react to it.
What I find so interesting is the people who have taken a negative situation like a major economic downturn and found a way to build a successful business.
In other words, they have made lemonade out of lemons. I am always inspired by the stories of people who have lost their jobs and retirement income and found a way to better themselves.
I don't know a lot about the stock market and investments, but I do know when my retirement accounts have significantly declined.
Many people I talk to have lost up to 50% of their retirement account because of the economic downturn. Those who are close to retirement age don't have much time left to recover those losses.
From the limited financial advice I have received over the years, I remember they always said over time, you would get the best growth from your money being invested in stocks.
This is all good as long as the stock market stays strong, but when it starts going down, you can lose a lot of money in a hurry.
I know most things go in cycles, and there will be a time when the market will begin to turn around. The frustrating thing is it never seems to go up as quickly as it dropped.
@starrynight - Yes I agree with you - owning a home of your own was always the American dream. Sadly, that dream has turned into a nightmare for a lot of people.
Since the 2008 economic downturn is the only one I have lived through, I don't have much to compare it to. It is interesting to listen to my parents and grandparents talk of other economic downturns they have lived through.
We bought our house right before the downturn started. When we see how much less our house is worth now than what it was a few years ago, it can be very discouraging.
I think it is really going to be hard for young people to be able to own their own home. Maybe after seeing how this has affected so many people they would rather continue to rent than buy anyway.
I think an economic downturn can almost become a self-fulfilling prophecy. Productivity goes down partly because a lot of businesses get spooked. They don't want to hire anymore employees (even though if they hired more employees it would stimulate the economy) or produce more goods.
I feel like many businesses do themselves a disservice during an economic downturn by trying to maintain the status quo. They should be trying to grow, which would result in economic stimulus!
@starrynight - The recession in 2009 was definitely the worst economic downturn I've ever lived through. However, one positive thing that happened afterwards in real estate is that it became a buyers market. A lot of people were able to buy real estate for fairly cheap.
I must say the most disturbing thing I witnessed during that time was the job market. So many people were competing over the same jobs that employers really had the upper hand. A lot of people I know accepted much lower salaries with fewer benefits during this time than they would have normally.
Having lived through an economic downturn (2009), I can say that all the things this article said are true. Especially the parts about unemployment and the value of real estate declining.
I feel like my whole life (up until 2009) I had been hearing about the virtues of owning real estate. "It's better to buy than to rent!" "You can buy a house and sell it in a few years to turn a profit!" Those things used to be true, but they certainly are not during an economic downturn.
Once housing prices fell, a lot of people were upside down on their mortgages. And people who were unemployed couldn't pay their mortgages and got foreclosed on by the bank. It was a disaster.
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