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A Brief Guide to Economic Recessions: Everything you need to know and nothing you don’t

The word ‘recession’ is being thrown around more often, but what does it really mean?

Needless to say, current events have led to a growing concern for the future of the global economy. Along with that, the “r” word has been thrown around like confetti and just the idea that a recession is here has put people on edge.

So, what exactly is a recession beyond a word that seems to spark panic?

What is a recession and are we in one now?

A recession is a period during which there is a significant decline in economic output as measured by the gross domestic product (GDP), which is the total dollar value of all goods and services produced in a specific time period. There is less demand for most products and services, which is often accompanied by elevated unemployment and a decline in production. Note: Contrary to popular belief, the stock market is not a leading indicator of economic health and therefore is not a predictor of a recession. (We’ll discuss this in a separate article).

We are seeing these signs now, but most economists would define a recession as TWO consecutive quarters of negative GDP growth. By that definition, we are not in a recession (yet!) since it hasn’t been officially announced. We still have to wait on Quarter 2 data to confirm.

Are we headed for a recession?

Yes, more than likely.

The U.S. economy has been growing steadily over the past 10 years and reached peak growth earlier this year. As a matter of fact, from June 2009 to Feb 2020, we were in the longest expansionary period in U.S. history.

So naturally, we were anticipating some sort of recessionary period to follow. The corona-virus outbreak, however, has accelerated that process and increased the impact of a recession.

The real question isn’t whether we are headed for a recession; the real question is how deep and how long this recession will be.

It is important to note that recessions are a normal and inevitable part of the business cycle. They may be unpleasant, but a recessionary period naturally follows an expansionary period.

How many recessions have we had?

That depends on who you ask (notice we said most economists agree on what defines a recession, not all). According to the National Bureau of Economic Research (NBER), which defines a recession as a “significant decline in economic activity spread across the economy lasting more than a few months,” there have been 33 recessions since 1854 that have lasted 17.5 months on average ( a little over a year and half on average). The most recent, known as The Great Recession, lasted 18 months from December 2007-June 2009, making it the longest recession since World War II.

Expansionary periods, however, have lasted an average of 44 months – a little over three years.

So, historically speaking, there’s been more good times than there have been bad times. Though painful to experience, a recession is not permanent so keep in mind that better days are ahead.

If you’re a nerd like me, you can view and download the full history of business cycles on the NBER’s website and see for yourself all the years in which there’s been a recession and expansion and the length of each in U.S. history.

THE BOTTOM LINE:

The term “recession” is often misused or misunderstood, but part of that may be attributable to the fact that even the experts can’t agree on a solid definition. The word alone may spark fear of an economic downturn, but we hope that you’ll remember the not-so-scary parts of it, too, and that is: Recessions are natural, necessary, and temporary.

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