The standard theory practiced by most economists is that the basic cause of a recession always comes down to aggregate demand. Aggregate demand is defined as something of a complex formula, but it essentially comes down to supply and demand being too far out of balance.
So, as an example, imagine a situation where Company Y has been producing product X for some years, and demand has always been high. Now all of a sudden, demand drops off. Meanwhile, Company Y has been invested the majority of their funds into producing overstock of product X. The end result is that Company Y now has a ton of product they can’t move, and they’re losing money fast. They have to downsize and lay off several employees in order to survive.
Now admittedly, this is an incredibly simplified example, as there are a lot more elements at play, but this should be at least enough to have a basic grasp on what causes a recession.
For example, the recession that began under George W. Bush has a lot to do with the housing market. The 1990′s were a very strong for the home market, so there were a lot of people expecting the 00′s to be the same.
A lot of bankers and lenders were keen on the idea of simply handing out as many loans as possible and making a hefty profit on the interest, and if the homes were foreclosed upon, then the bank could take that home and sell it. It didn’t quite happen that way. Rather, the housing market essentially collapsed on itself with so many investors eager to make a fast buck. People weren’t able to pay their mortgages, and nobody wanted to buy the homes that had been foreclosed upon. As of the time of this writing, the housing market is still in shambles and many are wondering how to find a job in a recession