Broadly speaking, a recession is popularly defined as two consecutive quarters of negative GDP growth.

Since GDP measures the total level of goods and services produced during the period, it is considered the broadest measure of the economy.

Technically speaking, a recession is officially determined by the National Bureau of Economic Research (NBER), a private non-profit organization that conducts economic research and is most famously known for deciding when recessions start and end.

The NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

But this determination usually takes months and by the time the NBER determines that a recession is “official,” the actual slowdown in the economy has ended and the recovery has already started. 🤦

What does a recession mean?

In general, two consecutive quarters of negative GDP growth define the start of a recession, but it’s not a hard and fast rule. And it’s not the only way the NBER determines whether a recession has occurred.

For example, there can be negative GDP growth in one quarter, but not because the economy is shrinking. Instead, it could be due to a large increase in inventories and trade balance but the “real” economy is still growing.

As you can see, the problem with using the definition of “two consecutive quarters of negative GDP growth” is it makes it more difficult to say whether the economy is in a recession or not. This definition does not take into account other macroeconomic factors like unemployment.

Economists say that other factors like industrial production, consumer confidence, and capacity utilization should be taken into account when stating whether a recession is in place. Declines in these macroeconomic factors help give a stronger signal that a recession is in place.

Basically, recessions are arbitrary designations, and the economy slows well ahead of any official recession.

How do you know if we’re in a recession?

How do you know if we’re actually in a recession?

The easiest answer is that you’ll see it in your own lives. Residential and commercial construction around your city will slow down. People you know will lose jobs or take pay cuts. Prices for things will begin to decline as stores accumulate large inventories because people have stopped spending and now they need to slash prices to get rid of items. Practically, that’s when you’re in a recession.

From a statistics standpoint, the manufacturing and service PMIs will decline, likely below 50. Additionally, unemployment will rise, probably to above 6% or higher.

In the U.S., jobless claims should rise solidly above 300,000 and towards 400,000 or higher.