A recession is a significant decline in economic activity, spread across the economy, lasting more than a few months. Output falls, unemployment rises, incomes and spending drop together.
You have probably heard it defined as two consecutive quarters of falling GDP. That is a useful rule of thumb and it is not the official definition anywhere that matters, which turns out to be a genuinely important distinction.
The two-quarters rule, and why it is not the rule
It is easy to apply and needs one number, which is why journalists use it. It also fails in both directions.
An economy can lose a million jobs in a single catastrophic quarter, recover slightly in the next, and never register two consecutive negative quarters, while everybody involved is unmistakably in a recession. Conversely, GDP can dip twice for technical reasons in an economy where employment is rising and nothing feels wrong.
GDP figures are also revised, sometimes substantially, months after publication. A recession declared on preliminary figures can be revised out of existence, and vice versa.
Who actually decides
In the United States, a committee at the National Bureau of Economic Research, a private non-profit. It has no statutory authority; its judgement is simply the one everybody has agreed to treat as authoritative.
The committee looks at several indicators rather than one: real personal income excluding transfers, employment, consumer spending, industrial production, wholesale and retail sales. It asks whether the decline is deep, broad and long enough, and it weighs those three against each other.
It also announces late, deliberately. Recessions are frequently declared six months to a year after they started, and dated retrospectively. The committee would rather be right and late than fast and wrong, since a declaration that has to be withdrawn is worse than a slow one.
Nobody rings a bell. A recession is identified afterwards, by a committee reading revised data, and by then you have usually been living in it for months.
What causes one
Most recessions come from one of four things, and often several at once.
- A demand shock. Households and businesses stop spending together. Confidence falls, spending falls, which reduces income, which reduces spending further.
- A supply shock. Something essential becomes scarce or expensive, an oil crisis being the classic case.
- A financial shock. Banks stop lending, credit dries up, and businesses that were solvent but needed to borrow fail anyway. 2008 was this.
- Deliberate tightening. A central bank raising interest rates to bring down inflation is intentionally slowing the economy. Occasionally it slows it further than intended.
That last one is the awkward case, because the recession is a side effect of a policy working, and there is no way to test the counterfactual.
The words around it
| Term | Meaning |
|---|---|
| Slowdown | Growth, but less of it. Not a recession. |
| Recession | Activity contracting broadly for months |
| Depression | No formal definition. Deeper and much longer. |
| Soft landing | Inflation brought down without a recession |
| Hard landing | The same attempt, with a recession |
The soft landing is the thing every central bank claims to be aiming for and few have achieved cleanly, because the instrument is blunt and the effects arrive with a delay of a year or more.
What it feels like from inside
Rarely dramatic, which is part of what makes it hard to spot.
Hiring freezes before layoffs start. Job listings quietly disappear. Small businesses close and are not replaced. Anyone paid partly through commission or discretionary spending feels it first, which is why service workers and anyone whose income depends on tips notice a downturn well ahead of the statistics. Ad-funded businesses are also early casualties, since advertising is one of the first budgets cut, which is why the economics of free apps turn hostile fast.
Small independent storefronts are the visible edge of it, which is why a shuttered high street reads as an economic indicator to people who never look at GDP. The independent café is often among the first things to go and among the last to return.
The short answer
A recession is a broad, sustained contraction in economic activity. It is judged on several indicators rather than one, it is declared retrospectively by people reading revised data, and the popular two-quarters shorthand is a convenience rather than a definition. By the time it is official, the question has usually stopped being whether one is happening and started being when it ends.