What a recession is
A recession is a period when the economy shrinks: businesses sell less, produce less and hire less, and many people lose jobs or income. It is the downturn phase of the normal business cycle, which swings between expansion and contraction.
You will often hear the shortcut definition: two consecutive quarters of falling GDP (gross domestic product, the total value of goods and services an economy produces). Many countries, including the U.K., commonly use it. It is a useful rule of thumb, but it is not the official test everywhere.
Who decides when it is a recession
In the United States, recessions are officially dated by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), a private, non-partisan research group. It defines a recession as a significant decline in economic activity spread across the economy and lasting more than a few months.
The committee looks at many indicators, not only GDP: jobs, real personal income, consumer spending, industrial production and retail and wholesale sales. Because it waits for solid data, it often announces a recession months after it began, sometimes after it has already ended.
That is why you will see headlines asking "are we in a recession?" while the experts are still debating.
What causes recessions
- High interest rates: when central banks raise rates sharply to fight inflation, borrowing and spending slow, and sometimes the economy tips into decline.
- Financial crises: bank failures, a credit crunch or a burst housing bubble (as in 2008) can cut off lending.
- Shocks: sudden events like an oil price spike, a pandemic (2020) or a war can disrupt supply and demand at once.
- Asset bubbles bursting: when stock or property prices collapse, people and businesses feel poorer and cut back.
- Loss of confidence: if businesses and households expect hard times, they spend and invest less, which can bring on the slowdown they fear.
Warning signs economists watch
| Indicator | What to watch for |
|---|---|
| Yield curve | When short-term government bond yields rise above long-term ones (an "inverted" curve). It has preceded many past U.S. recessions, though with long and variable delays, and not every inversion has led to one. |
| Unemployment | A steady rise in the jobless rate and in weekly claims for unemployment benefits |
| Sahm rule | Signals a likely recession when the three-month average unemployment rate rises 0.5 percentage points or more above its lowest level of the previous 12 months |
| Business surveys (PMIs) | Readings below 50 mean activity is shrinking |
| Consumer spending and confidence | Falling retail sales, weaker confidence surveys |
| Corporate earnings | Companies cutting forecasts across many industries |
No single indicator is perfect. Economists look for several flashing at once.
Recession, depression, soft landing
- Recession: a significant economy-wide decline lasting months. U.S. recessions since World War II have lasted roughly 10 months on average.
- Depression: a far deeper and longer collapse, like the Great Depression of the 1930s. Very rare.
- Soft landing: when a central bank brings inflation down by raising rates without causing a recession.
- Hard landing: when the rate rises do cause a recession.
- Stagflation: weak growth combined with high inflation.
What a recession means for you
Jobs and income
The biggest effect for most people. Companies freeze hiring, cut hours or announce layoffs. Industries tied to the economic cycle, such as construction, manufacturing, retail, travel and some parts of technology, are usually hit hardest. Raises and bonuses tend to shrink.
Interest rates
Central banks usually cut interest rates to support the economy. That can make loans and mortgages cheaper but lowers what savings accounts pay.
Prices
Weaker demand usually slows inflation, though prices rarely fall outright.
Investments
Stock markets often fall ahead of and during recessions, sometimes into a bear market, and they have often begun recovering before the recession officially ends, because markets look ahead. Government bonds often rise as investors seek safety.
Startups
Venture investors become more cautious, so funding rounds get smaller and harder to raise, and some startups cut staff or shut down.
How to prepare for a recession
- Build an emergency fund: a common guideline is three to six months of essential expenses in an accessible savings account.
- Pay down high-interest debt, especially credit cards and other variable-rate loans.
- Keep your skills and network current; it is easier to find work when you are not in a hurry.
- Avoid panic-selling investments you hold for long-term goals; historically, selling at the bottom has locked in losses.
- Review your budget and know which costs you could cut quickly if you needed to.
This guide is general information, not personal financial advice.
