St. Louis Fed, Report: All About the Business Cycle, Where Do Recessions Come From?
“So, what does a ‘typical’ recession look like? Recessions usually include the following characteristics:”
“A. A negative shock such as a financial crisis occurs.”
“B. Firms reduce investment spending on machinery, equipment, new factories, and new office buildings (physical capital). In fact, typical recessions begin with reduced business investment spending, which is the most volatile component of GDP because businesses can postpone this type of spending.”
“C. As business investment falls, affecting employment and demand for inputs, consumers reduce spending on new houses and durable goods such as furniture, appliances, and automobiles.”
“D. As spending declines, firms that produce these products see declining sales and increasing inventories. They decide to cut production levels and lay off some workers.”
“E. Rising unemployment and falling profits lead to further declines in spending.”
“F. Eventually, the declines will end as consumers and businesses reduce debt and increase their ability to spend and as producers lower their prices to reduce inventory.”
“G. Lower interest rates and resource prices make investment and spending more attractive.”
“H. Firms take advantage of low interest rates and resource prices by increasing investment spending on capital goods as they anticipate the next expansion.”
“I. Consumers take advantage of low interest rates by borrowing to spend on new houses and durable goods.”
“J. The increased demand for products and services increases employment and income, and consumer spending levels rise.”
“K. As consumer spending increases, businesses increase production and employment.”
“L. Recession ends, beginning the next expansion.”