Definition
In the US, the National Bureau of Economic Research (NBER) officially dates recessions using a broad set of monthly indicators: employment, real income, industrial production, real sales — not just GDP. The 'two consecutive quarters of negative GDP' rule is a useful heuristic but not the formal definition. Recessions typically last 6-18 months in modern economies but produce lasting damage: unemployment spikes, corporate bankruptcies rise, credit tightens, and equity markets fall 20-40% peak-to-trough. Historically, recessions follow yield curve inversions by 6-24 months, arrive after aggressive Fed tightening, or are triggered by exogenous shocks (2020 pandemic). Not all recessions are recognized in real time — the NBER usually declares them 6-12 months after they begin.
Example
The 2008 Great Recession officially ran December 2007 to June 2009 (18 months). US GDP fell 4.3% peak-to-trough, unemployment doubled from 5% to 10%, and the S&P 500 fell 57%. NBER didn't officially declare it until December 2008 — a year after it started.
Frequently Asked Questions
How is a recession officially declared?
In the US, by the NBER Business Cycle Dating Committee, which considers multiple monthly indicators. The 'two negative quarters of GDP' rule is a shortcut but not always accurate — some recessions had only one negative quarter.
How do stocks behave in recessions?
Historically, S&P 500 declines average 30-35% peak-to-trough during recessions. But markets are forward-looking — the worst equity returns often come BEFORE NBER declares a recession, and recoveries begin BEFORE recessions end.
Can you predict a recession?
No indicator is perfect. Historically reliable signals include inverted yield curve, ISM manufacturing below 45, jobless claims rising, and credit spreads widening. Multiple simultaneous signals raise probability but never confirm.