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Most economists define a recession as a sudden decline in real gross domestic product (GDP) for three consecutive quarters. However, the media has been leading the public into many misconceptions, causing people to use the word without a clear sense of the definition. As a result, consumer confidence is in a free-fall and many Americans are almost certainly walking into some regrettable investment mistakes. Due to the generally mistaken view that recession automatically means bad investing times in the future, several investors are tending to cash out early. The word “recession,” as it sits undefined is being used incorrectly time after time, and different misconceptions of the word are spreading like a wild fire throughout the public amongst those least educated or unprepared.

Often, without knowing the characteristics of the definition, through the hype of the media, we begin to believe our economy is in a much worse state than it actually is. A majority of Americans who are hearing the term from the media for the first time do not have the slightest idea of how to measure a recession, and in many cases mistake it for a common slowdown incorporated in the business cycle. Many economists cite four phases of the cycle – prosperity, liquidation, depression, and recovery. Those periods of “liquidation” and “depression” are mistaken for a recession, when in reality a recession is a much more severe slowdown.

During a period of “prosperity” a rise in production becomes evident. Employment, wages, and profits increase correspondingly and businesses tend to invest in expanding production. Businesses are liable to run into obstacles that obstruct further expansion leading into period of decay, or “liquidation.” For example, production costs may shoot up, shortages of raw materials may hinder production, interest rates may rise, or prices may increase. Consequently, consumers react to increased prices by buying less. Businesses, then,...