You may hear that a recession occurs when the GDP growth rate is negative for two consecutive quarters or more, but a recession can quietly begin before quarterly gross domestic product reports are out. That’s why the National Bureau of Economic Research (NBER) measures four factors using monthly data to determine whether a recession happened. When these economic indicators decline, so will GDP. The NBER uses the expertise of its committee to determine whether the country is in a recession. That way, it isn’t boxed in by set numbers. NBER can use monthly data to determine when a peak or trough has occurred. Most recessions are short, averaging 11 months from 1945 to 2019, but their impact can be long-lasting. A recession is a contraction in the economy; after a recession, the economy enters the expansionary phase where it must return to the level it was before the recession and continue expanding. Because expansion is the normal state of the economy, this phase tends to run longer than the contractionary phase. For example, the longest expansionary phase in U.S. history ran from 2009 to 2020—a total of 128 months.
Economic Indicators of a Recession
The most important indicator of a recession is real GDP. Real GDP is a measurement of everything businesses and individuals in the United States produce. It’s called “real” because the effects of inflation are stripped out. When the real GDP growth rate first turns negative, it could signal a recession, but sometimes growth will be negative and then turn positive in the next quarter. Additionally, the Bureau of Economic Analysis might revise the GDP estimate in its following report, so it’s difficult to determine if you’re in a recession based on GDP alone. That’s why the NBER measures the following monthly statistics. These give a timelier estimate of economic growth. When these economic indicators decline, so will GDP. These are the indicators to watch if you want to know whether the economy is in a recession:
Real income: Measures personal income adjusted for inflation. Transfer payments, such as Social Security and welfare payments, are removed. When real income declines, so do consumer purchases and demand.Employment: The employment rate and real income together tell the commissioners about the overall health of the economy.Manufacturing: The commissioners look at the manufacturing sector’s health, as measured by the Industrial Production Report.Retail sales, adjusted for inflation: Tells commissioners how firms are responding to consumer demand.Real Gross Domestic Product: The NBER also looks at monthly estimates of GDP provided by economists such as Macroeconomic Advisers.
Manufacturing jobs are generally regarded as one of the first signs that a recession might be starting. This is because manufacturers receive large orders months in advance. If those orders start to decline over time, so will employment at factories. When manufacturers stop hiring, other sectors of the economy tend to slow as well. A fall-off in consumer demand is usually the culprit behind slowing growth. As sales drop, businesses cease expanding. Soon afterward, they stop hiring new workers. By that time, the recession is underway.
Recession Example
The Great Recession of 2008 started in 2006 when housing prices began to fall. Bad lending practices, securitized derivatives of bad loans, deregulation, and an interconnected global financial system all played a part in creating the financial crisis and the recession years before the economy crashed.
Recession vs. Depression
In a recession, the economy contracts for two or more quarters. A depression will last for several years. The unemployment rate tends to be lower during a recession. For example, unemployment rose to 10.0% during the Great Recession and 14.7% during the 2020 recession. During the Great Depression, which lasted from 1929 to 1939, the unemployment rate peaked at 25.59% in 1933. A recession can become a depression if it lasts long enough. However, there is no set period a recession must last or conditions that must be met for a depression to be recognized. Instead, it is a greatly exaggerated and lengthy contraction of one or more economies—you’ll also know that you’re in a depression because you’ll have been enduring a recession for a long time.
