What is an economic recovery, when does it occur?

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Economic Recovery

Following a recession, economic recovery is defined as a period of persistent improvement in corporate activity. As the economy recovers, gross domestic product (GDP) rises, unemployment reduces, and incomes rise.

During an economic recovery, the economy adapts to new conditions, including the reasons that initially produced the recession and the new policies and laws imposed by central banks and governments in reaction to the crisis.

As jobless employees find new employment and bankrupt enterprises are bought up or divided, capital products, the labor, and other productive resources that were locked up in businesses that faltered and fell under during the recession are utilized in new activities. Recovery is the process through which an economy recovers from the harm it has sustained and prepares for new growth.

Understanding a Recovering Economy

Market economies go through highs and lows for a variety of causes. All types of events, such as revolutions, global impacts, and financial crises, can impact economies. Market fluctuations can sometimes follow a pattern that resembles a cycle or wave, with various stages of growth or boom, a peak that leads to a recession, an economic crisis, and a subsequent recovery.

Following a recession, the economy adapts and recovers some of the gains lost during the downturn. When growth increases and GDP moves toward a new high, the economy shifts to a real expansion.

Not every slow growth period, or even decrease, qualifies as a recession. The most general rule of thumb in the United States is that a recession occurs when GDP growth is negative for two consecutive quarters.

The Recovery Process

Many firms fail and go out of business during a recession, and those that do survive curtail their operations to save costs in the face of lower demand for their products. Employees are frequently laid off, and company assets are auctioned off in pieces. It is not uncommon for business owners to be compelled to liquidate their whole company.

Some of these business assets find their way into the hands of other enterprises, occasionally even start-ups, who can put them to good use. These are sometimes quite similar to their past applications, and other times they are whole new business lines. The essence of economic recovery is the process of sorting capital products into new combinations, with new ownership, and at new prices, after they have been liberated from bankrupt enterprises or corporate cutbacks during the recession.

Entrepreneurs must account for changing economic conditions as they reorganize productive capital and labor into new firms and activities. Real economic shocks, such as the oil price increases of the 1970s and 2008, have induced recessions in various business cycles.

Compared to the cheap credit days of the bubble that preceded the recession, businesses often have to deal with a thinner lending climate. They may need to deploy new technology and organizational structures. The economic and regulatory environment in which firms operate almost inevitably shifts from boom to bust.

Finally, the recovery can alter economic activity patterns, sometimes dramatically and sometimes subtly. In a similar fashion to how the body breaks down dead and damaged tissue in order to develop new, healthy cells and tissues following an accident, the economy heals the harm caused during previous phases of the economic cycle by reallocating, recycling, and reusing resources.

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