Downward trend in the business cycle characterized by a decline in production and employment, which in turn lowers household income and spending.
Even though not all households and businesses experience actual declines in income, they become less certain about the future and consequently delay making large purchases or investments. Consumers buy fewer durable household goods, and businesses are less likely to purchase machinery and equipment and more likely to use up existing inventory instead of adding goods to their stock. This drop in demand leads to a corresponding fall in output and thus worsens the economic situation. Whether a recession develops into a severe and prolonged depression depends on a number of circumstances. Among them are the extent and quality of credit extended during the previous period of prosperity, the amount of speculation permitted, the ability of government fiscal policies to reverse (or minimize) the downward trend, and the amount of excess productive capacity. Compare {{link=depression">depression .