Economics & Markets · definition
Recession
A recession is a significant, broad and persistent decline in economic activity. A common shorthand is two consecutive quarters of falling real GDP, though official definitions are broader.
A recession is a significant decline in economic activity that is spread across the economy and lasts more than a few months. The popular shorthand is two consecutive quarters of falling real GDP, but official arbiters use a broader set of indicators including employment, income and industrial production.
Key takeaways
- The two-quarters rule is an informal shorthand, not the official definition in the United States.
- In the U.S., the National Bureau of Economic Research (NBER) dates recessions, often long after they start.
- Recessions typically bring rising unemployment, falling profits and falling interest rates.
- Since 1945 U.S. recessions have averaged roughly 10 months, far shorter than expansions.
How recessions are declared
The NBER's Business Cycle Dating Committee looks at monthly indicators (payrolls, real income, consumption, production) and announces turning points with a deliberate lag, sometimes a year. Other countries follow the two-quarter convention more mechanically. The gap between experience and announcement means an economy can be in, or out of, recession well before anyone makes it official.
Causes and varieties
Recessions arrive by different routes: central banks raising rates to fight inflation (the early 1980s), financial crises (2008), bursting asset bubbles (2001), pandemics (2020) and oil shocks (1973). Each variety has its own depth and recovery shape, which is why letters (V, U, L, K) populate commentary after every downturn.
What typically happens in markets
Historically, equity markets often peak before recessions begin and trough before they end, making the stock market a leading but noisy indicator. Government bond yields tend to fall as central banks cut rates. An inverted yield curve (short rates above long rates) has preceded most postwar U.S. recessions, a regularity documented by the Federal Reserve, with debate about every new instance. None of these patterns is a timing tool; they are historical descriptions.
Frequently asked questions
What is the difference between a recession and a depression?
There is no official line. "Depression" is reserved informally for extreme, prolonged contractions such as the 1930s, when U.S. output fell by roughly a quarter and unemployment exceeded 20%.
Does a recession mean everyone's income falls?
No. Aggregate activity falls, but effects are uneven across sectors, regions and households, which is part of why dating committees look beyond any single number.
Sources
This entry is for education only. Investing Value describes how financial concepts work; it does not provide investment, tax or legal advice, and nothing here is a recommendation to buy or sell any asset.