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.