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What Is a Recession?

A recession has traditionally begun when the GDP growth rate is negative for two consecutive quarters or more.

Recessions, explained

People often say a recession is when the GDP growth rate is negative for two consecutive quarters or more. But a recession can quietly begin before the quarterly gross domestic product reports are out. That's why the National Bureau of Economic Research measures the other four factors.1 That data comes out monthly. When these economic indicators decline, so will GDP.

Additionally, the National Bureau of Economic Research (NBER) defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months…” The NBER is the private non-profit that announces when recessions start and stop. It is the national source for measuring the stages of the business cycle.

On some occasions, the NBER declines to confirm a recession, even with two consecutive quarters of negative GDP growth.

The textbook definition of a recession was first suggested by Julius Shiskin, then-Commissioner of the Bureau of Labor Statistics, in 1974. He was a great deal more precise, though:

  • Decline in real gross national product for two consecutive quarters
  • A 1.5% decline in real GNP
  • Decline in manufacturing over a six-month period
  • A 1.5% decline in non-farm payroll employment
  • A reduction in jobs in more than 75% of industries for six months or more
  • A two-point rise in unemployment to a level of at least 6%

What this means for you

Recessions mean things cost more and what you own is worth less.

Recessions are destructive in that they typically create wide-spread unemployment, which is why so many are typically impacted when they occur. As the unemployment rate rises, consumer purchases fall off even more. Businesses can go bankrupt.

In many recessions, people lose their homes when they can't afford the mortgage payments. Young people can't get a good job after school which can throw off a person's entire career.

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