There have been a lot of discussions lately on whether or not we are headed for another recession. There has also been a lot of controversy over what defines a recession.
The National Bureau of Economic Research defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months.”
A common rule of thumb is that a recession involves two consecutive quarters of economic contraction, although that isn’t part of the National Bureau of Economic Research’s official definition and not all officially recognized recessions have met that test.
The technical definition of a recession is two consecutive quarters of “negative” economic growth as measured by a country’s Gross Domestic Product (GDP), although the National Bureau of Economic Research does not necessarily need to see this occur to call a recession.
The first two definitions state that even if GDP is positive, you can still have a recession if GDP is declining. The last definition states that you must have a negative GDP for two consecutive quarters to define a recession. This is a huge difference and contributes to why this subject can be confusing.
The last time the U.S. had a negative GDP for two consecutive quarters was in 2009. We did have a couple of scares in 2011 and 2014 when one negative GDP quarter hit, but the second quarter returned positive.
Another scare came after a rough 4th quarter in 2018. GDP came in below 2nd quarter’s GDP of 4.20% and 3rd quarter’s GDP of 3.4%. It came in at 2.2%. This alerted the economists, who saw this as a pattern. Therefore, they revised the estimated GDP growth for the 1st quarter down to 0.3%. The actual GDP for the 1st quarter ended up at 3.2%. This is good news.
Just to give you some perspective of GDP numbers, at the end of World War II, when our country was booming, U.S. Real GDP grew as high as 12.8% in a year. But as of the late 20th century, the norm for GDP became 0-5% with a focus on 2-3% to keep the economy strong and steady. The stock market has been building since 2009 and we continue to hit all-time highs. No one knows how long it will last before we move into a recession. But we do know that occasional recessions are part of a normal economic cycle, so we should get prepared, both financially and psychologically, for one in the future.