Effects of Recession on Business

Readers Question: What will happened to the income of business sector if there is an economic decline in America?

An economic decline in the United States, is pretty much guaranteed to reduce the income of the business sector. The recent falls in the US stock markets are largely due to  expectations of a future downturn in the economy. Lower growth leads to lower profits, therefore dividends decline and shares become less attractive. If the US enters into recession, firms will experience a decline in profitability. This is because:

  1. Tendency for price wars to develop in a recession. Low sales encourage firms to cut prices
  2. Falling sales will lead to lower revenues.

Some firms will be affected more by the downturn. Firms producing luxury goods (Income elasticity of demand >1) will experience the biggest % fall in demand. This is likely to include manufacturers of luxury cars, 5 star hotels. Firms producing basic necessities will be more insulated from the effects of a recession.

By on January 30th, 2008

10 thoughts on “Effects of Recession on Business

  1. Recession is a decrease in the economy of the country. People stop buying things that are excessive – housing, furniture, clothing, etc. That decreases the sales and cash outlay. Companies have to lay off people because of lack of business and that makes people decrease spending even more. It is a cycle that comes from fear of the future. A recession is a shallow and shorter cycle than a depression

  2. Pingback: Daily Mortgage Rates News – Increase in Rates Inevitable?
  3. The recession has taken its payment in the UK economic outlook with many businesses, they particularly dealing with cash problems. But others have resisted development and have created successful strategies to maintain a healthy cash flow forecast and to be remaining profitable.

  4. The current economic recession has really taken a toll the the Jamaican economy, leaving most citizens of Jamaia unemployment and strugling to take care of their families. However my suggestion is that the government of Jamaica should find some necessary ways to help our country rebound from this crisis. What he could do however, is that he could advocate deficit spending and cut taxes in order for us to rebound.

Comments are closed.