What Is a "Recession"?

A "recession" is quite a misunderstood event. If you watch the news at all, then I am sure that you have heard this word quite often over the past few months. Many economists and "talking heads" on TV are forecasting that the United States is about to enter a recession due to a number of factors including the falling housing market.

Here's the thing though. You just don't wake up one day and say "Ok, we are in a recession." You only ever learn that the country went through a recession after the fact. Sure, you might think that the country is going through a recession due to your personal circumstances, but the very definition of the word "recession" is a decline in a country's GDP for two straight quarters. The "GDP", which means "Gross Domestic Product", refers to the total market value of all final goods and services produced within a country in a certain period of time. So if the GDP falls, or is "negative", this means that you have negative economic growth. Two quarters of negative economic growth in a row and you have a recession.

In a "recession" you will see declines in such things as payroll growth, industrial output and real business growth. You only find out about these numbers months after the fact when they are released by the government, so again, a person can't really say with 100% certainty "we are in a recession right now." You might believe it to be true, but until you see negative growth in two straight quarters, you won't know for sure. And by the time you realize that a recession has in fact taken place, the recession is usually over and economic growth has resumed once again.

Recessions are a natural part of the business cycle. You will have periods of expansion and periods of contraction. You need not panic when you hear talk of "recessions" on the evening news; the economy can't grow every single quarter, and sometimes we will have negative growth. This is all natural, and not an indication that we are about to enter into the next Great Depression.

Technically speaking, the United States hasn't entered into a recession for quite a while. There were three quarters of negative growth in 2000 and 2001 (Q3 2000, Q1 2001, Q3 2001), but technically this didn't constitute a recession as there weren't two negative quarters of growth in a row. Most economists will throw the technicalities out of the window and say that we indeed had a recession in late 2000 - 2001, which I would agree with.

Technically speaking, the last true recession lasted from July 1990 to March 1991. After that, the US economy had a basically uninterrupted ten year period of growth which finally started to falter with the popping of the dot-com bubble in 2000 and 9/11 in 2001.

In theory, we won't know if we are currently in a recession until months down the line. However, it seems pretty likely that the United States is in a recession right now, or very close to it.

Filed under: The Economic Meltdown | Stock Market Education