What Is a Recession?

Custom illustration describing what happens during a recession: unemployment rate rises, consumer purchases fall off, businesses go bankrupt, people lose their homes, young people can't get a good job after school.

The Balance


A recession is a significant decline in economic activity, lasting more than a few months. There's a drop in the following five economic indicators: real gross domestic product, income, employment, manufacturing, and retail sales.

Key Takeaways

  • A recession is a significant decline in economic activity, lasting more than a few months. 
  • In the business cycle, a recession occurs between the peak and the trough. 
  • The National Bureau of Economic Research analyzes the United States economy to determine where it is in the business cycle.
  • The NBER uses many economic indicators other than real GDP to determine when a recession began. 

How Recessions Work

A recession is a decline in the economic output of an economy accompanied by a decrease in income and employment. The National Bureau of Economic Research (NBER), which offers official recession declarations, defines a recession as "...a significant decline in economic activity that is spread across the economy and lasts more than a few months."

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 gauges the depth, duration, and diffusion of an economic slowdown to determine if it was a recession.

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.


Note that the stock market is not an indicator of a recession. However, a stock market crash can cause a recession because many investors lose confidence in the economy.

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.

Frequently Asked Questions (FAQs)

What will happen in a recession?

Generally speaking, during a recession an economy's gross domestic product and manufacturing will decline, consumer spending drops, new construction slows, and unemployment goes up.

What is a recession in simple terms?

A recession is a prolonged period of economic contraction, although there's an ongoing debate about the exact definition.

Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. National Bureau of Economic Research. "Business Cycle Dating Procedure: Frequently Asked Questions."

  2. National Bureau of Economic Research. "Business Cycle Dating."

  3. Congressional Research Service. "Introduction to U.S. Economy: The Business Cycle and Growth," Page 1.

  4. The Federal Reserve. "Industrial Production and Capacity Utilization - G.17."

  5. The National Bureau of Economic Research. "Business Cycle Dating Committee Announcement."

  6. U.S. Census Bureau. "Monthly Advance Report on Manufacturers’ Shipments, Inventories And Orders."

  7. U.S. Bureau of Labor Statistics. "Top Picks," Select “Unemployment Rate,” Retrieve Data, ”Select 2007-2020,” Select “Go.”

  8. FRED, Federal Reserve Bank of St. Louis. " Unemployment Rate for United States."

Related Articles