Recession

Key takeaways

• A recession is a significant, widespread, and prolonged decline in economic activity—commonly measured by falling GDP, employment, and production.
• The “two consecutive quarters of negative GDP” rule is a simple guide, but official dating (e.g., by the NBER) relies on multiple indicators and is often determined retroactively.
• Common predictors include an inverted yield curve and other leading indicators (ISM PMI, Conference Board LEI, OECD CLI), though no predictor is perfect.
• Causes combine economic shocks, financial imbalances, and shifts in confidence; policy tools (fiscal and monetary) aim to limit depth and duration.
• Recoveries vary in shape (V, U, L, W, K) and unemployment typically lags behind other signs of recovery.

What is a recession?

A recession is a broad downturn in economic activity that is deep and sustained enough to affect employment, production, and spending. While two consecutive quarters of negative GDP are often cited, official determinations use multiple measures—such as payrolls, industrial production, and retail sales—and place emphasis on the overall depth, breadth, and duration of the decline.

How recessions unfold

Recessions can be self-reinforcing. Falling consumer demand reduces company revenues, prompting layoffs that further weaken spending. Financial market declines can reduce household wealth and investment, amplifying the downturn. Because some signals move at different speeds (equities may fall early; unemployment often remains high after activity turns up), public and private perceptions of when a recession begins and ends can differ.

How recessions are measured

Official bodies (for example, the National Bureau of Economic Research in the U.S.) assess multiple indicators—nonfarm payrolls, industrial output, retail sales, and others—rather than relying on a single rule. As a result, recessions are often identified after the fact, once enough data has been evaluated.

Predictors and leading indicators

• Inverted yield curve: Historically, an inversion (short-term yields exceeding long-term yields) has preceded many U.S. recessions, reflecting market expectations of near-term weakness and future rate cuts. Not every inversion leads to recession, however.
• Leading economic indicators: Surveys and indices—such as the ISM Purchasing Managers Index, the Conference Board Leading Economic Index, and the OECD Composite Leading Indicator—are used to gauge turning points.
  No single signal is definitive; forecasters use a combination of indicators and judgment.

Common causes

Recessions can arise from a mix of forces:
* Economic shocks: sudden disruptions like a sharp oil-price spike or a pandemic that interrupt production and demand.
* Financial factors: credit booms followed by contractions, asset bubbles and crashes, or a tightening of money supply (monetarist view).
* Psychological factors: swings in confidence—overexuberance during booms and pessimism during downturns—can amplify cycles (Keynesian and Minsky-style explanations).

Effects on the economy

Typical recession impacts include:
* Reduced GDP and industrial output
* Rising unemployment and lower household income
* Falling consumer and business spending
* Lower interest rates as central banks attempt to stimulate activity
* Larger government deficits as tax revenues decline and safety-net spending rises

Recessions vs. depressions

A depression is an unusually deep and prolonged recession. There is no strict numerical threshold, but historical examples show far greater declines in output and employment. For context:
* The Great Depression saw U.S. output fall roughly 33%, stock prices plunge about 80%, and unemployment reach about 25%.
* Severe recessions (e.g., 1937–38) produced large GDP drops and high unemployment rates compared with typical business-cycle recessions.

Recent and notable examples

• 2008–09 Global Financial Crisis: a deep, widespread downturn that was the most severe since the Great Depression and prompted major policy responses.
• 2020 pandemic recession: very sharp but short in official duration; the downturn was designated a recession because of its depth and breadth despite its record-short length.

Typical duration and recovery shapes

• Historical average: U.S. recessions since 1857 averaged about 17 months; recessions since 1980 have tended to be shorter (averaging under 10 months in recent decades).
  Recovery shapes describe how activity rebounds:
• V-shaped: sharp decline followed by a quick recovery
• U-shaped: longer period at the bottom before recovery
• L-shaped: prolonged stagnation with minimal recovery
• W-shaped: double-dip recession (decline, recovery, then renewed decline)
• K-shaped: uneven recovery where some sectors or groups recover while others continue to decline

Policy responses

Governments and central banks use both automatic stabilizers (e.g., unemployment insurance) and discretionary actions:
* Monetary policy: cutting interest rates, liquidity provision, and other central-bank measures
* Fiscal policy: stimulus spending, tax relief, and targeted support to households and businesses
These tools aim to cushion income losses, support demand, and prevent a temporary downturn from becoming a deeper crisis.

Bottom line

A recession is a significant decline in economic activity that affects output, employment, and spending. Measuring and dating recessions requires multiple indicators and judgment; policymakers use fiscal and monetary tools to limit damage. Because causes and paths of recovery vary, monitoring a range of economic signals and understanding policy responses help frame expectations during downturns.