Glossary
Recession
A significant, widespread decline in economic activity lasting more than a few months; in the US the dates are set by the NBER.
A recession is a broad, significant fall in economic activity that lasts more than a few months. Output, jobs, incomes and spending decline together across many industries. In the US, the official start and end dates are set by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER Business Cycle Dating Committee), a private nonprofit, rather than by any government agency. Recessions matter to investors because corporate earnings usually fall during them, and stock markets often decline before they begin.
How it is identified
The NBER looks for a decline that is deep, diffuse across the economy and lasting. It weighs several monthly indicators, including real personal income less transfers, nonfarm payroll employment, household employment, real consumer spending, wholesale and retail sales, and industrial production, along with quarterly GDP. It dates the peak and trough by month, and it typically announces them many months after the fact.
You will often hear a rule of thumb: two consecutive quarters of falling real GDP. That is a popular shorthand, not the official definition. The two can disagree; initial estimates showed real GDP falling in the first two quarters of 2022, but the NBER did not declare a recession, partly because employment kept growing strongly.
Recessions and markets
Stocks are forward-looking, so the market has often peaked months before a recession starts and bottomed well before it ends. In the 2007–2009 episode, the S&P 500 peaked in October 2007 and bottomed in March 2009, three months before the recession officially ended. Indicators that have preceded past recessions include an Inverted yield curve, falling Purchasing managers' index (PMI) readings and rising jobless claims, though none has a perfect record.