Recession

A significant, widespread, and sustained decline in economic activity — formally designated by the NBER using multiple indicators including GDP, employment, and income.

The popular definition of a recession is two consecutive quarters of negative GDP growth, but in the US the official arbiter is the National Bureau of Economic Research (NBER), which uses a broader definition. The NBER looks at depth, breadth, and duration of declines across GDP, real income, employment, industrial production, and retail sales — meaning a recession can technically be called without two consecutive negative GDP quarters.

Recessions are a normal if painful part of the economic cycle. They typically follow periods of excess: over-leveraged balance sheets, overbuilt inventories, asset price bubbles, or policy tightening that goes too far. Unemployment rises with a lag as companies first reduce hours and freeze hiring before moving to layoffs. Consumer spending contracts, business investment falls, and credit conditions tighten.

For investors, recessions are associated with bear markets in equities, falling earnings, credit spread widening, and eventually lower interest rates as the central bank shifts to easing. Markets tend to be forward-looking: equity prices typically bottom before the recession ends as investors price in the eventual recovery. Historically the best time to buy stocks is when economic news is still terrible but the rate of deterioration is beginning to slow.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.