What is a recession?
There are two definitions for a recession: one is the official definition as outlined by the National Bureau of Economic Research (NBER), a private, nonprofit, non-partisan organization that focuses on conducting and distributing economic research. The other is an unofficial definition outlined in books.
The NBER defines a recession as "a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade."
On the textbook side, a recession is defined as “two consecutive quarters of receding real GDP, or gross domestic product, according to NBER. The organization does not use this definition, however, because GPD data is released quarterly rather than monthly. The data is also subject to significant change.
Are there any benefits to having a recession?
The sole benefit to a recession is that it’s the remedy for inflation, which is the general rising of prices of an economy’s goods and services.
What are the indicators of a recession?
The Balance reports these are the indicators that a recession can occur.
- Real GDP, which is the most important indicator, is what's produced by individuals and the U.S. "Real" denotes that the effects of inflation are taken out. When real GDP goes negative, it can indicate that a recession is on the way. But growth could turn negative and then become positive in the next quarter.
- Real income, which is how much an individual makes after adjusting for inflation. A decrease in real income, in which adjustments for Social Security and welfare payments are also made, means a decrease in demand and consumer purchases.
- Health of the manufacturing sector, the industry is part of the group of goods production, according to the Bureau of Labor Statistics. Establishments in the sector typically include plants, mills and factories. The Industrial Production Report measures real output relative to a base year in the aforementioned industries and the like, according to Investopedia.
- Manufacturing and wholesale retailer sales are adjusted for inflation when reviewed as an indicator of a recession.
- Monthly GDP estimates are reviewed by the NBER. The organization is provided the estimates by Macroeconomic Advisers, which focuses on the economic outlook of the U.S. and daily GDP to name a few.
Excluding real GDP, the NBER measures the above indicators because they give a more prompt estimate of economic development.
It’s important to note that the stock market is not an indicator that a recession is coming. Prices on the stock market are a reflection of public companies’ expected earnings. Still, a stock market crash can cause a recession as investors lose confidence in the economy.
How is a recession different from a depression?
A recession is short in duration — it typically only lasts nine to 18 months. During that time, the economy contracts for two quarters or more. But a depression goes on longer and will last for several years.
How does a recession affect me?
Despite a recession being short in length, it’s possible for long-term impacts to occur. One of the main affects is unemployment. As the unemployment rate increases, purchases decrease. That could cause businesses to go bankrupt.
Additionally, unemployment could lead people to be unable to afford their mortgages. College graduates and those seeking employment may be unable to get a solid career going, potentially throwing it off altogether.