Recession
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What Is Recession?
A recession is a significant, widespread, and sustained decline in economic activity. An informal, commonly cited rule of thumb defines it as two consecutive quarters of falling GDP, but that is not the official standard. In the United States, the National Bureau of Economic Research (NBER) is the recognized arbiter of recession start and end dates, and it weighs a range of indicators beyond GDP, including employment (nonfarm payrolls), income, and spending. Because of this broader approach, the economy can post two down quarters without the NBER declaring a recession: in the first half of 2022, output fell for two quarters, yet strong employment led the NBER not to classify it as one. A recession is milder and shorter than a depression, the severe, prolonged downturn seen in the 1930s.
Why It Matters
Recessions matter because they involve job losses, falling incomes, and reduced business activity that affect nearly everyone. Understanding how they are defined helps explain why headlines can disagree about whether one has begun. The popular two-quarter rule is convenient but can mislead, because the NBER looks at the depth, breadth, and duration of a downturn across many indicators before dating it, often months after the fact. History shows the range: the 2020 pandemic recession was extraordinarily deep but brief, while the Great Recession around 2008-2009 pushed unemployment to about 10%. Because official dating lags real time, economists watch leading indicators such as the yield curve for early signals of elevated risk, while treating no single measure as a definitive verdict about whether a recession is underway.
Test Your Knowledge
Questions on this topic from the EconRecall fact bank:
- One informal, commonly cited (though not official) rule of thumb defines a recession as how many consecutive quarters of GDP decline?
Two consecutive quarters - Which organization is the official, widely recognized arbiter of U.S. recession start and end dates?
The National Bureau of Economic Research (NBER) - The NBER's official recession determination looks at multiple indicators beyond GDP, including which labor market measure?
Employment levels (nonfarm payrolls)