What is a recession? The economic concept explained. What causes and happens during one.

Inflation has slowed significantly and growth of the nation's gross domestic product has remained solid, but some economists still expect a mild recession this year.

Overall prices increased 3.5% in March, compared with a year earlier, driven largely by the rising cost of rent and gasoline, according to the Labor Department’s consumer price index. On a monthly basis, costs rose 0.4%, similar to the previous month.

Meanwhile, the nation’s gross domestic product, the value of all goods and services produced in the U.S., expanded at a seasonally adjusted annual rate of 3.4% in the October-December period, the Commerce Department said. That’s down from sizzling growth of 4.9% in the third quarter, but well above the 2% advance predicted by economists in a Bloomberg survey.

So how could a modest downturn happen? The past two recessions were sparked by shocks to the economy – a housing crisis and a pandemic. A downshift later this year could be triggered by the delayed effects of the Fed's 5.25 percentage points in interest rate hikes since early 2022, a campaign aimed at taming soaring inflation. Some economists were expecting growth to slow to about 2% in 2024, so it wouldn't take all that much to nudge the economy into a mild slump.

If a recession does happen, how will it unfold, and what does it mean for everyday life?

Here is what you need to know.

What is a recession?

In simple terms, a recession is "a contraction in economic activity" or "when the economy shrinks," said Sameer Samana, senior global market strategist for the Wells Fargo Investment Institute.

To be more specific, a recession is "a significant decline in economic activity that spreads across the economy and lasts more than a few months," said Michael Pugliese, an economist with Wells Fargo.

In determining whether a recession has occurred, the nonprofit National Bureau of Economic Research doesn't just look at GDP but rather at a variety of indicators such as employment, consumer spending, retail sales and industrial production.

When it comes to defining a recession, it could be a technical recession or a true recession, said Samana.

"The biggest distinction is the severity," he explained. "A technical recession is more of a mathematical downshift. A true recession is a more meaningful contraction across a broader range of categories."

Are we in a recession? US economy has been remarkably resilient so far

Will there be a recession in 2024?

Though economists have been forecasting a recession for a while, we almost certainly aren't in one now. And while growth is expected to slow this year, inflation's pullback - notwithstanding a flare-up early this year - and forecasts for at least one Fed rate cut have lowered the odds of a slide. Keep in mind not even the best economists can predict with certainty when the next recession will begin.

But for now, the unemployment rate is still historically low at 3.8%. The job market is sill solid despite a recent slowdown.

As for recession odds, some believe we can expect a recession to begin later in 2024 than they initially predicted. Economists say there's a 30% chance of a downturn in 2024, much lower than the 60% odds they gave earlier this year, according to forecasters surveyed by Wolters Kluwer Blue Chip Economic Indicators.

Economists keep saying there'll be a recession in six months. It hasn't happened

What is a mild recession?

A mild recession could cost the economy as little as a few hundred thousand jobs or up to 1.8 million jobs if the nation’s gross domestic product, or economic output, declines 1.2%, and the unemployment rate rises from the current 3.8% to about 5.4%.

What is a severe recession?

A severe recession could mean 3 to 4 million job losses, a 2% to 2.5% decline in GDP, and a 7% unemployment rate. The "Great Recession" lasted from December 2007 to June 2009, which was the longest economic downturn since World War II, according to the Federal Reserve. 

When was the last recession? Here's a brief history of recent downturns

What happens during a recession?

During a recession, the economy shrinks as a result of a pullback in spending, mostly by consumers and businesses.

"Consumption, consumer spending makes up about 70% of the U.S. economy," Samana said, explaining that during a recession, the cutback in spending "then feeds into overall demand for services."

From this, companies can pull back on the number of people they employ, further contributing to the contraction of economy activity. Unemployment often rises during recessions, and total employment levels can flatline or turn negative, said Pugliese.

In addition, GDP growth tends to shrink during recessions because there's less consumer demand and fewer employees, leading to lower production of goods and services.

"If you have fewer employees, all else equal, you're going to potentially produce less in a recession," Pugliese said. "All of these things are tied together. Most of those indicators are either slowing down in growth terms, or in many cases, contracting."

Wages are also affected by recessions, said Samana.

"It's harder to argue for wage increases," he explained. If unemployment is high, employers could deny the salary request and claim a worker could be replaced by someone else for a lower wage, instead of a higher one.

Much like other goods and services, housing prices also can decrease during a recession, he said.

Stagflation vs recession: What's the difference? 

What about layoffs if a recession happens in 2024?

There’s little doubt there would be some pain as hundreds of thousands of workers likely lose their jobs. Already, a wave of tech layoffs has hit that industry.

As a result of those job losses, those still employed will worry they might get laid off themselves and pull back spending. And the hottest job market on record will continue to cool off, leaving workers with fewer opportunities and putting a damper on job hopping.

But don’t expect the trauma of the past two recessions, which each threw millions of people out of work. Yes, the job market almost certainly would weaken in coming months, but it probably won’t come to a standstill, economists say.

Hiring accelerated in March as employers added a booming 303,000 jobs despite high interest rates, stubborn inflation and growing household financial stress.

Are there recession proof jobs? These occupations tend to be least impacted

Is there going to be a richcession?

We could end up having a richcession, the trending term coined by Wall Street Journal reporter Justin Lahart in January to describe a recession that disproportionately hurts rich people.

He argued that a richcession could be brewing because household wealth for those at the top didn't grow as much as it did for those at the bottom,  percentage-wise, over the course of the pandemic.

Wealth on the bottom grew as a result of stimulus checks and other government stimulus money as well as wage increases to try to keep up with inflation and attract workers in a historically-tight labor market. Wealth at the top, meanwhile, stagnated because paychecks weren't rising as much and the stock market was declining after peaking in early 2022, hitting the wealthier especially hard.

But the market has rebounded strongly in recent weeks and the S&P 500 index isn't far off it's all-time high.

What is an earnings recession?

An "earnings recession" occurs when there has been earning declines or negative earnings growth for at least two consecutive quarters. According Forbes, during an earnings recession, a majority of company profits declined "year-over-year for two or more quarters in a row."

Earnings for S&P 500 companies were falling since late 2022 but corporations emerged from the earnings recession in the July-September quarter. Some analysts believe one may occur this year.

How long do recessions last?

To be categorized as a recession, an economy typically experiences a couple of back-to-back quarters of shrinking output.

However, there is no definite timeframe for how long a recession must last, and the length of a downturn can vary, explained Pugliese.

"You can have some that are very short and quick. You could have others that are a lot more long-lasting."

Who suffers the most during a recession?

Anyone can be impacted during a recession, said Samana, such as lower-income people or unskilled laborers.

It is hard to generalize that one group may experience a greater impact more than others, said Pugliese. During the 2020 recession due to COVID-19, the hardest hit industries were leisure and hospitality, but in the 2001 recession, the tech industry struggled, he explained.

"I think it just depends a lot of what's driving the slowdown in the first place," said Pugliese.

Economic downturns explained: What is a recession vs. a depression?

What happens to inflation during a recession?

Historically, when the economy has slowed, inflation appears to remain high.

But as a recession sets in, inflation will begin to fall. This can occur after a quarter or two of economic contraction, said Samana.

"The tricky part this time around is how much does it come off," he said. "How it should work is the economy would need to roll over first; people would need to feel the impacts of that rollover. They'll probably start to rein in their spending, which will then start to filter into those prices."

What is inflation? Understanding why prices rise, what causes it and who it hurts most.

What should you buy before a recession?

It’s not a bad idea to stock up on household goods and shelf-stable foods while you still have a regular paycheck if you’re afraid you won’t have one in a couple of months.

But make sure to not get carried away.

You may also want to try to pay off as much debt as possible, particularly any high-interest debt.

What should you avoid doing in a recession?

In a recession, spending should be monitored. Try to avoid frivolous spending and going off budget.

Additionally, if possible, try to avoid taking on more debt.

What to avoid, what to buy? How to financially prepare for 2023 — in case of recession.

Should you buy a home during a recession?

Americans are split on whether they would buy a home during a recession, according to a study by Cinch Home Services, a warranty company.

The National Association of Realtors defines a housing recession as when home sales drop for six straight months. In November, existing home sales rose after five straight months of declines, The median sales price rose 4% to $387,600, NAR said..

Nearly half of Americans surveyed in the Cinch study said that they would "more likely" buy a home in the event of a recession.

However, 42% of American homeowners polled in the Cinch survey said they would be less likely to buy a home during a recession and 14% said a recession would not impact their plans either way. Among those participating in Cinch's survey, 72% were homeowners, 24% were renters and the remaining 4% were living somewhere without making a payment.

Are we in a rolling recession?: Why economists think we are.

What is a rolling recession?

While a recession is a decline in economic activity across the board, a rolling recession impacts certain regions or industries more than others. While some sectors experience downturns, the national economy may continue to grow, according to the Federal Reserve Bank of San Francisco.

According to Charles Schwab economists, we were already in a rolling recession the past couple of years.  For example, many economists believe the housing market and manufacturing were both in recession territory.

Contributing: Clare Mulroy

This article originally appeared on USA TODAY: What is a recession? A guide to the economic concept and what it means