The Recession Effect

When the recession was declared in the press to be particularly serious, I noted an interesting pattern amongst my friends. Everyone was talking about the recession and how they should cut back on spending. Being concerned, of course (heh. heh. heh.), I asked them why that was so? Were they retrenched? Were their parents or relatives fired? The answer was no.

Recessions have an interesting effect on spending, because people are likely to start cutting back on spending simply because of the economic climate instead of their own financial situation. It is understandable to cut back if the finances have gone south back home, of course. However, such caution in a large scale is part of the recession problem in the first place.

Companies that try to cut back in anticipation (or in response to) poorer business tend to decide to fire people sooner or later. These people might not be picked up by other companies because...those are cutting back, too! Eventually there will be a bunch of unemployed people who are unable to spend, further driving business down. The situation worsens. I think most will understand where this cycle leads.

Now, the interesting thing is recovery. Surprisingly enough, the opposite situation can happen during a "recovery". When enough people convince themselves that the recession is over, they start hiring and spending again, driving business back up. The one we're seeing now is likely premature considering the international problems at the moment, but is an illustration of just how sentiment can cause self-fulfilling prophecies.