What Is a Recession?
Let me tell you directly: a recession is a significant and widespread downturn in economic activity that lasts longer than a few months. You might hear the rule of thumb that two consecutive quarters of shrinking gross domestic product (GDP) signal a recession, but it's more complex than that.
Key Takeaways
Economists measure the length of a recession from the peak of the prior expansion to the trough of the downturn. These periods can last as little as two quarters, but full recovery for the economy—and possibly the stock market—might take years to reach previous peaks. An inverted yield curve has predicted the last 10 recessions, though some predictions didn't come true. Unemployment often stays high even into recovery, making the early rebound feel like the recession is still going for many people. Nations rely on fiscal and monetary policies to curb recession risks.
How Recessions Work
Since the Industrial Revolution, economies have generally grown steadily with occasional contractions, but recessions remain common. From 1960 to 2007, the IMF recorded 122 recessions in 21 advanced economies, and they've become less frequent and shorter recently. The declines in output and employment during recessions can feed on themselves—for instance, falling consumer demand leads companies to lay off workers, which reduces spending power and weakens demand further. Bear markets during recessions can erode wealth, cutting consumption even more.
Governments worldwide, especially since the Great Depression, have implemented fiscal and monetary policies to stop ordinary recessions from turning severe. Some stabilizers are automatic, like unemployment insurance that supports laid-off workers. Others, such as interest rate cuts to boost investment, require deliberate action.
The National Bureau of Economic Research (NBER) assesses recessions using indicators like nonfarm payrolls, industrial production, and retail sales, without fixed rules on weighting. For NBER, a downturn must be deep, pervasive, and lasting to count as a recession, and many are identified only after they've started or ended.
Recessions are clearest in hindsight, and experiences vary: investors might sense one early from market drops and falling earnings, while workers feel it lingering due to high unemployment even after recovery begins.
What Predicts a Recession?
No single predictor is foolproof, but an inverted yield curve has preceded each of the 10 U.S. recessions since 1955, though not every inversion resulted in one. Normally, short-term yields are lower than long-term ones due to duration risk—think a 10-year bond yielding more than a two-year one because of potential inflation or rate hikes. Inversion happens when long-term yields drop below short-term ones, often signaling expected economic weakness and future rate cuts.
Investors also watch leading indicators like the ISM Purchasing Managers Index, the Conference Board Leading Economic Index, and the OECD Composite Leading Indicator to gauge recession risks.
What Causes Recessions?
Economic theories group causes into economic, financial, psychological factors, or mixtures. Some emphasize structural shifts, like a sustained oil price surge raising costs economy-wide. Financial theories highlight credit growth in good times leading to contraction in bad ones, with monetarism blaming insufficient money supply growth.
Psychological explanations point to over-exuberance in booms and pessimism in busts. Keynesian economics stresses how these factors prolong recessions, and the Minsky Moment concept describes how bull-market euphoria fuels unsustainable speculation.
Recessions and Depressions
The U.S. has seen 34 recessions since 1854 per NBER, but only five since 1980. The 2008 crisis aftermath and early 1980s double-dip were the worst since the Great Depression and the 1937–38 slump. Typical recessions drop GDP by 2%, severe ones by 5%, per the IMF. A depression is a deeper, longer recession without a strict definition.
In the Great Depression, U.S. output fell 33%, stocks dropped 80%, and unemployment reached 25%. The 1937–38 recession saw GDP fall 10% and unemployment hit 20%.
Recent Recessions
The 2020 COVID-19 pandemic triggered a recession due to its deep economic shock, as designated by NBER. In 2022, debate arose over whether the U.S. was in recession amid mixed indicators. Analysts at Raymond James noted that despite two quarters of GDP shrinkage, rising employment and personal income (excluding ended stimulus) suggested no recession. Federal Reserve data from late 2022 similarly showed no recession by key NBER metrics.
On April 6, 2025, U.S. Treasury Secretary Scott Bessent downplayed recession concerns, focusing on long-term economic fundamentals in an NBC interview.
What Happens in a Recession?
In a recession, economic output, employment, and consumer spending fall, while interest rates often drop as central banks like the Federal Reserve cut them to support growth. Government budget deficits grow from lower tax revenues and higher spending on unemployment insurance and social programs.
When Was the Last Recession?
The last U.S. recession was in 2020 at the pandemic's start, ending in April 2020 per NBER—it was short but qualified due to its depth and pervasiveness.
How Long Do Recessions Last?
Since 1857, U.S. recessions have averaged 17 months, but the six since 1980 averaged under 10 months.
The Bottom Line
A recession is a significant, widespread, prolonged economic downturn, often marked by two quarters of negative GDP growth, though assessments are more nuanced. Unemployment is a core indicator, as falling demand leads to layoffs, reduced spending, and more layoffs. Since the Great Depression, governments have used policies like unemployment insurance and rate cuts to keep recessions from becoming depressions.
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