What causes a recession?

The economic domino effect has begun, but there is still time to stop it

Everyone is wondering whether the economy is going into a recession — or if we are already in one.

But what causes a recession?

A recession is caused when a chain of events, like a line of dominoes, picks up momentum and does not stop until the economy shrinks. Each event is connected to something that happened before and something that will happen in the future. If the price of a hamburger goes up, you might stop buying hamburgers. This would impact a restaurant, and that would impact a server. There are many interconnected chains like this throughout the economy.

The dominoes leading toward a new recession have started falling, but when will they stop?

(Animations by Peter Crowther for The Washington Post)

(Peter Crowther for The Washington Post)

(Peter Crowther for The Washington Post)

The first domino to fall in this economic cycle was a spike in prices last year. That phenomenon is called inflation.

Throughout 2021, inflation got worse. Virtually everything became more expensive. Car parts became more expensive. Then cars became more expensive. Many products went through a similar disruption. The White House and Federal Reserve became worried about high inflation, but their efforts to control it had little impact. They knew inflation was causing a chain reaction that could hurt the economy, but they continued to be surprised when prices kept rising.

The Federal Reserve is in charge of controlling inflation. So in March, they raised interest rates for the first time since the pandemic began. Raising interest rates is supposed to make it more expensive to borrow money so that people will stop spending so much. At first, it looked like they had succeeded. Many thought inflation would slow. But then Russia’s prolonged invasion of Ukraine caused a bunch of economic problems. Inflation picked up new momentum.

After that, more dominoes began to fall. One chain of events split into two fast-moving chains of events.

What causes a recession? The economic domino effect has begun

First, the stock market really started to tumble. This erased a lot of wealth all at once. That can lead to a recession.

And second, companies and consumers became nervous about the future. Economic anxiety can make people decide to hold on to their money and stop spending. These kinds of decisions can help lower inflation. But that didn’t happen this time.

Russia’s invasion of Ukraine made gas prices go up, which made the cost of so many other things go up. Recession risks went up, too.

What causes a recession? The economic domino effect has begun

As people became more nervous about the future, it started to look like a recession was inevitable. Some companies started preparing to pause hiring. This tends to happen before a big round of layoffs. And since prices kept going up, the Fed was forced to hike rates even more. This makes many people think a recession could be right around the corner. We appear to be teetering on the precipice.

What causes a recession? The economic domino effect has begun

So what happens next?

There are two scenarios that could play out.

It’s possible the Fed could play things perfectly and stop a recession before one begins. They could end up slowing the economy without causing it to contract altogether. In this case, companies don’t end up laying workers off, inflation comes down, and people feel more assured about the economy.

But there’s another scenario: The dominoes keep falling. Companies lay off workers, and those families stop spending as much money. If people stop spending money, more companies lay off workers and the cycle intensifies — and the dominoes appear unstoppable.

What causes a recession? The economic domino effect has begun

Which way will the economy go?

Only time will tell if the Fed can get inflation under control and stabilize the economy. The central bank is on a path to significantly raise rates this year, and there are signs that those moves are already working. The housing market is cooling off but not crashing. And pockets of the labor market are slowing down even though mass layoffs haven’t started.

Inflation continues to reach new peaks, and the dominoes continue to fall. Policymakers hope this chain of events will eventually stabilize. They just don’t know when. Or how.

This series is an examination of some of the most prominent economic themes of the year, explaining to readers their origins and impact during this highly uncertain period. These topics affect the finances of all Americans, and understanding what is happening can make you better prepared for what happens next.

About this story

Animations by Peter Crowther for The Washington Post.

Contributions from Damian Paletta and Rachel Siegel. Editing by Jen Liberto. Art direction, design and development by Emily Wright. Design editing by Virginia Singarayar.