What is a recession?
In one line: A recession is a big, widespread drop in a country's economic activity, such as spending, jobs and output, that lasts more than a few months.
The rule of thumb
You'll often hear: "two quarters in a row of falling GDP is a recession." GDP is the total value of everything a country produces.
Example: the economy shrinks at a −0.6% yearly pace one quarter and −0.3% the next. By the rule of thumb, that's a recession. The GDP report guide shows how that number is released.
Who officially decides in the US
In the US, the rule of thumb is not the official test. A group of economists at the National Bureau of Economic Research (NBER) dates recessions. They look at jobs, income, spending and factory output together.
They often decide months after a recession starts. Two recent ones:
| Recession | Start | End | Length |
|---|---|---|---|
| Great Recession | Dec 2007 | Jun 2009 | 18 months |
| COVID-19 | Feb 2020 | Apr 2020 | 2 months |
What traders watch
- Jobs data: the monthly jobs report and weekly jobless claims
- Spending: retail sales
- Business surveys: like the ISM PMI
- The Yield curve: an inverted curve has come before many past recessions, though not always
Why it matters
Recession fears can change the mood of whole markets. Stocks may fall into a bear market (see Bull and bear market). Investors may move toward assets seen as a Safe haven. A Central bank may cut interest rates to support the economy.
A common mistake
Trading the word "recession" in headlines. Markets often move on recession fears before any official call, and sometimes the fear passes with no recession. By the time NBER announces one, prices have usually already moved. Your chart shows what price is actually doing; trade that, with your stop in place.
Questions
How long does a recession usually last?
US recessions since World War II have mostly lasted under a year and a half. The 2020 recession lasted only two months.
What is the difference between a recession and a depression?
A depression is a much deeper and longer recession. There's no exact official line between them. The 1930s Great Depression is the best-known example.
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