What is a Recession? - Master of Finance Degrees

A recession is an economic term for a short-term decline in economic growth. Different entities and professionals have different definitions for what recessions are, but all of the explanations center around certain economic indicators. It is also important to know what recessions mean to the everyday person and their routine experiences in the economy.

Decrease in Gross Domestic Product

One way to define recessions is when the gross domestic product (GDP) declines every month in a row for six months. The GDP includes transactions that take place within the United States. Some economists believe that there may be earlier signs or more subtle signs of recessions before this six month period happens. For example, several quarters of slowing growth followed by a month of negative growth could also indicate an economic decline.

Drop in Five Key Economic Indicators

The National Bureau of Economic Research measures five key economic indicators. If all five of these are met for at least six months, a recession is declared. Those five indicators include real gross domestic product, personal income, employment rates, manufacturing levels and retail sales. A big sign of a future decline is a decrease in manufacturing. Most manufacturing is done a few months in advance. A drop in July manufacturing could be noted, and income, employment and retail sales drops could follow a few months after that. The initial decrease in manufacturing is usually related to a decrease in consumer demand. The process is cyclical. When people have less money, they buy less.

Federal Government Definition

According to The Balance, the official federal government’s definition of recessions includes a period of declining economic activity that takes place throughout the country over a period of several months. This definition, provided by the National Bureau of Economic Research, offers some flexibility. The National Bureau of Economic Research is also responsible for declaring the beginnings and endings of recessions. The National Bureau of Economic Research is a board of more than 1,300 economists who use their experience and available data in order to make these determinations.

Consumer Definition or Experience

Recessions can also be defined based on the experiences of the consumers who are affected by economic declines. In real-world experiences, everyday people often define recessions as when their hours are cut and their income drops to a point that makes it difficult for them to meet their basic living expenses. For example, a drop in manufacturing could mean that factories lay people off or cut people back from working 40 hours per week to working 30 hours per week. The workers may not be able to afford their rent or house payment, car payment, utilities, food and other basics on the lower income. This ripples through the economy as people spend less at the grocery store, stop buying new cars and curb their leisure spending. The result is a nationwide decrease in sales, employment, income and business transactions.

Recessions may not be as economically destructive as depressions, but they do have lasting impacts on consumers. Being aware of the signs of recessions and understanding how they are measured could help a person anticipate changes and avoid an unpleasant surprise. Keep in mind that these definitions of a recession vary, and the identifiers could change over time.