Consumer Impact of Recession: Understanding Economic Downturn Effects

How Does a Recession Affect Consumers?

Introduction

According to Merriam-Webster's dictionary, a recession is a period of reduced economic activity. The reduced economic activity, known as less spending, affects consumers and businesses.

Businesses Reduce Workforce

When economic activity slows, businesses begin to suffer. When businesses suffer, they cut expenses in an attempt to remain profitable. One method of cutting expenses during a recession is to reduce the workforce. Unfortunately, when businesses lay off employees, consumers' ability to spend money is curtailed.

The employees fortunate enough to keep their jobs tend to spend less money because they fear for their jobs. This further exacerbates a recession.

Increased Cost of Living

The rising costs of fuel, food and basic daily items further cause consumer difficulties. When consumers spend increased portions of their monthly budget on necessities such as food, fuel and gas, it leaves less money for them to pour into the economy to help offset an economic slowdown.

Credit Debt and the Recession

During a recession, many consumers are heavily in debt with little to no savings. As a result, they try to hold on to whatever money they have. Some consumers severely cut back on credit card spending; others cannot afford to pay their monthly credit card bills. The reduced spending and defaulting on credit card agreements not only affects the consumer, it adds to the financial burden banks face during a time of recession.

Banking Problems

A downturn in the housing market, coupled with unchecked bank lending practices, can contribute to an increase in home foreclosures. Consumers can find themselves owning homes that were worth less than the outstanding mortgage loan. When they're unable to sell the home and pay off the outstanding mortgage, some consumers allow the bank to foreclose on the home, leaving the banks with a large inventory of foreclosed homes that are worth less than the amount of the outstanding mortgage.

The housing market often favors buyers during a downturn, yet consumers have a hard time getting financing. During a recession, home buyers must come up with larger down payments in addition to having a stellar credit history.

Consumer Spending Down

While it is understandable that consumers need to hold onto the money they have during a recession, the longer consumer spending is down, the longer and deeper a recession lasts.