We hear a lot about the R-word these days. What would a recession mean? A good piece from Fox Business explains:

With fewer people working, we can expect income growth to stall. In the 1981-82 downturn, average weekly earnings fell in six of the 16 recession months; in 1990-91, average weekly earnings fell in four of the eight months as it did in 2001.With lower incomes comes a cutback in spending. So far, that’s all bad news. But spending cutbacks and reduced income means businesses are limited in their ability to pass along any increases in expenses in the form of higher prices. Indeed, to move goods off of shelves, businesses are more likely to reduce prices – and inflation.

That’s what happened in the 1981-82 recession and the 2001 recession: consumer price index inflation in 1981-82 went from 10.8% to 3.8% over the course of the downturn; in 2001 inflation went from 3.0% to 1.6%. (In 1990-91, inflation at the end of the recession was 4.8% as it had been at the onset.)

Indeed, over the course of all of the last three recessions, “real” earnings – that is earnings adjusted for inflation – went from being negative to positive as inflation ebbed. That’s the silver lining in the cloudy economy and reflects the basic coordinating force of the economy, of any free-market economy: the price system. Simply put, that means prices adjust to consumer demands and it is those adjustments which will provide the basis for the economic recovery. As prices drift downward and commodities become more affordable, consumer spending will increase. The increase in consumer spending, over time, leads to an increase in industrial production – to restock those shelves – improving corporate profits leading to increased employment and improved earnings, and so forth as the economic cycle goes on.

There are a couple of things which may complicate a quick recovery including a sharp run-up in consumer debt and a slippage in home values which cuts into the ability of debt-laden homeowners to tap into home equity to pay off credit card debts. That may be even more difficult as bank regulators urge banks to tighten lending standards.

There will be pain for those who lose jobs during and because of the recession or recession-like environment, and the burden will fall to those who remain employed who will benefit from the lower prices. And it is just that benefit which will help us out of a recession in an economy dominated by consumers who will have the opportunity to play hero!