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The economy's wild ride

Many say we're headed into a recession - but what are they talking about?

By Buckberry Joyce, Times Staff Writer
Published March 3, 2008

The word recession has been used a lot lately in describing what is happening to the nation's economy. To understand what recession means, it helps to understand some basic economics.

People in our society buy and sell things. You and your family buy groceries, gas and school supplies. Companies buy things, too - fast food restaurants need potatoes for french fries and buns for burgers; carmakers need parts to make their cars. Governments also pay for things: cancer research, military weapons, even the toilet paper used in government buildings.

Sometimes the economy moves fast, with people and companies buying and selling things quickly. Encouraged by all this activity, store owners may increase their hours, hiring more workers or paying overtime to employees. They may buy more goods to sell, increasing the demand for manufacturing. Some people might even open stores or start a business.

But sometimes the economy slows down and there is less buying and selling. Although this is okay for a short time, over a long period, it can have bad effects. With fewer people buying goods, store owners may have to cut their hours, reducing the number of employees or not paying for overtime hours. There is less of a need for new products, and some businesses may even close. This long slowdown period is called a recession. Some economists think that the U.S. economy is in a recession now.

Sometimes the government steps in to try to adjust the speed of the economy, and sometimes it lets it run its course. Either way, the economy is always changing, and ups and downs are just part of business as usual.

Information from the Web site msnbc.com and freelance writer Jennifer Maughan (www.ehow.com) was used in this report.

When the economy is going up, up, up, people spend, spend, spend. Businesses expand and start to compete for the same resources (materials and workers). The businesses have to pay more for their resources, so they charge their customers more. Prices go up. When prices go up, workers ask their employers for more money. Businesses then pass this extra cost back to the customers.

When the economy grows too quickly like this, it's called inflation. The government tries to put the brakes on things by increasing interest rates, making it harder for people to borrow money and, hopefully, slowing down buying and selling.

The most desirable economy would be a steady series of hills and dipsso that each increase is balanced with a slowdown.

When prices are high and people are saving more than spending, the economy slows down. If this slowdown lasts for months, creating a cycle that's hard to break, it's called a recession. The government can step in to help, cutting interest rates so it's easier to borrow money. This move is intended to jump-start the economy and increase spending.

Economists sometimes differ in their definitions, but a depression is an unusually slow economy overlapping unusually high unemployment. Basically, it's a long or extreme period of recession.

Stagflation, a combination of stagnant and inflation, is another word that's in the news lately. In fact, some people are using it to describe the current economy in the United States. With stagflation, prices are rising on goods like gas or food, but unemployment is also high or growing, meaning people don't have the money to match the higher prices.

[Last modified March 2, 2008, 20:14:33]