What’s a recession and how do we know if we’re in one?

Whenever the media starts to use the word recession, people seem to go into a panic. The media is always quite vague, but will mention the fact that it will affect the “working man” and jobs will be lost. Unfortunately, there isn’t a universally agreed upon definition for the term recession. It’s often a matter of opinion and the indicators are also shaky – depending on who you talk to.

Congress is well known for dismissing the indicators of a recession, while economists will define a recession in specific industries, not for the country as a whole. Without a lot of analysis, here are some classic definitions. There’s really not as scary as you think.

Recession – How it’s Measured
The standard media definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. That means that we’re simply not exporting as much as usual. Usually, this may not mean that people have lost jobs. It could simply mean that we’re trading more inside our own borders, or have lost / pulled contracts from overseas. It usually doesn’t take job loss or consumer spending into account. (Which is how the everyday, average Joe will predict a recession. We know when our wallets are tight and our neighbors are losing jobs. )

The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) provides another method to determine if we are moving into a recession. They look at the current economic trends as a whole. Although it is a complicated algorithm, they analyze economic activity by looking at things like employment, industrial production, real income and wholesale-retail sales. They define a recession as the time when business activity has reached its peak (typically, a boom, like the “dot com boom”) and starts to fall. This is usually the beginning of a recession. This is why when major markets such as real estate bottom out, there tends to be a mild recession. It’s actually a normal part of the business cycle - what goes up, must come down. And eventually, with a few years, another industry will boom and take the economy on an upward ride again. .

When the business activity starts to rise again it’s called an expansionary period. By this definition, the average recession lasts about a year. So when the media calls for a recession, is there really anything for consumer to fear? Long term, for the average American, no. However with trends in the current housing market, many consumers who chose to overspend on homes they could not afford are now paying the price – which is a price they will still be paying once the recession has lifted. It’s a good rule of thumb for every working American to put aside some savings and live within their means – no matter how good or bad the general economy is going.