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- A recession is a significant decline in economic activity that can last months or even years.
- Most experts agree we aren't in a recession yet, but there's some risk that we could be headed for one in the next year.
- There are steps you can take to prepare emotionally and financially for a recession.
There's been a lot of argument lately over whether the U.S. economy is heading toward a recession or whether one has already happened. If you're confused about the answer, you're not alone — even economists and other financial experts often disagree.
This much we know for sure: The National Bureau of Economic Research (NBER), which is typically considered to be "the official recession scorekeeper" as the White House put it, has not declared a recession since a short one in 2020 around the start of the Covid-19 pandemic. Before that, the last recession was the 2007-2009 Great Recession. In general, these aren't frequent events in modern history.
Still, the current economic situation doesn't always feel good for consumers, with inflation and high interest rates making many everyday purchases more expensive than they used to be. Meanwhile, issues like an inverted yield curve, where short-term interest rates are higher than long-term rates, give many economists concern that a recession could happen soon. So far, though, the U.S. has been able to ward off a recession and get closer to what's termed a soft landing, where inflation falls, and interest rates can start to come down, without the economy entering into a recession.
Understanding recessions
In many cases, a recession is defined as two consecutive quarters of negative GDP. However, many argue this definition is overly simplistic since it doesn't take employment, wages, business investment, and a range of other factors into account.
The NBER uses a broader definition, stating that a recession is "a significant decline in economic activity that is spread across the economy and that lasts more than a few months."
Keep in mind that a recession is not the same as a depression, which is typically described as a more extended and severe version of a recession.
Note: The original definition of a recession was popularized in a 1974 New York Times article by Julius Shiskin. In it, Shiskin says that a healthy economy expands over time, so two consecutive quarters of slowed growth suggest an underlying problem.
Who decides when a recession has started?
The NBER's Business Cycle Committee is typically considered the authority that decides whether or not we're in a recession. The NBER is a private, nonpartisan organization that analyzes major economic issues.
"The Business Cycle Committee labels all parts of the U.S. economic cycle — the peak, the trough, etc.," says Anessa Custovic, PhD, chief investment officer of Cardinal Retirement Planning. "They have a set of criteria that they use to identify a recession."
And since the release of macroeconomic data usually lags the time periods for which it is collected, by the time the NBER does declare a recession, we've often already been in one for at least a few months.
How long does a recession last?
How long a recession lasts depends on its severity. But they don't usually last as long as most people think. According to data from the NBER, the average recession since 1854 has lasted about 17 months.
Custovic points out that if we look at more recent examples — like from 1945 to 2020 — the average length of the economic contraction in the U.S. is a little more than 10 months. "This suggests that the length of recessions are getting shorter now compared to historical ones," she says.
Note: In February 2020, the U.S. economy's expansion peaked, and the next month, the country fell into a recession caused by the COVID-19 pandemic. The NBER concluded that the recession lasted two months, making it the shortest on record.
Key economic indicators of a recession
As the NBER sees it, a recession spans different areas of economic activity, not just one factor like GDP. Also, some economic indicators can foreshadow recessions, based on what tends to happen after certain events like high periods of inflation.
With that in mind, some important economic indicators of a recession include:
GDP growth rate
Although not everyone agrees with the simpler definition of a recession being two consecutive negative quarters of GDP growth, it still tends to be a significant indicator, as GDP — while arguably imperfect — is often used as a proxy for the overall economic success of a nation. In many cases, a recession involves negative GDP growth, combined with other negative economic indicators, as detailed below.
Unemployment rate
A high unemployment rate also tends to be a significant component of a recession, as it signifies the economy is slowing down, with businesses laying off more workers. Some experts say that the reason the U.S. didn't enter a recession in 2022, for example, was because of a strong labor market, despite negative GDP growth.
Consumer spending
When consumer spending declines, that can signify a recession has or will soon occur. Because when consumers pull back, that affects business revenue, which can then lead to layoffs if companies aren't making enough to pay staff. In turn, that can create a negative cycle of even lower consumer spending if incomes fall and more people find themselves out of work.
Inflation rate
High inflation initially tends to signal the opposite of a recession, because inflation often happens when the economy grows very quickly. However, it can foreshadow a recession, because central banks tend to raise interest rates to try to cool the economy so that inflation falls. Yet if that ends up slowing down the economy significantly, it can lead to a recession.
Current economic data
Current economic data shows that the U.S. economy isn't in a recession by most commonly accepted measures. Although inflation persists and the Fed has kept interest rates relatively high, there's widespread agreement that the overall conditions consistent with a recession have not been met. In many respects, economic data has been strong recently, although there's still some concern that we're not out of the woods yet in terms of making the soft landing of lower inflation without a recession.
Here are some current economic data and what that potentially says about a recession:
The stock market
Two broad measures of the stock market — the S&P 500 and Dow Jones indexes — have both been rising in 2024. As of mid-August 2024, the S&P 500 is up over 17% since the start of the year, while the Dow Jones is up nearly 8%.
The stock market isn't a perfect measure of the overall economy, but when it increases, that often reflects strong corporate profits and/or future outlooks. However, stocks sometimes increase due to other factors that don't signify economic strength, such as if stocks happen to be more attractive than other assets to investors, based on factors like the money supply controlled by the Fed.
Unemployment rates
Since hitting an all-time high of 14.7% in April 2020, the unemployment rate has been relatively low the past few years. It has been ticking up recently, though, going from 3.5% in July 2022 to 4.3% in July 2024. That caused some concern among stock market investors, but more recent data on unemployment claims that came in below expectations helped quell concerns that the U.S. is heading toward a recession. Generally, unemployment rates below 5% signify a healthy economy, but it depends on the circumstances of a given period.
Yield curve
There's no way to perfectly predict a recession, but there are certain warning signs economists watch out for. One significant indicator is when the yield on 10-year Treasury bonds drops below the yield on two-year Treasury bonds. This is called an inverted yield curve, and it indicates investors are losing confidence in the economy vs. a more typical environment where long-term rates are higher than short-term ones. That inversion can also contribute to more restrictive lending, which can cause a recession.
For the most part, the yield curve has been inverted since July 2022, which has contributed to many economists being on edge that a recession will happen soon. While that hasn't materialized yet, the New York Fed predicts a 56% probability of a recession by July 2025 based on a similar indicator of 10-year Treasuries being below 3-month Treasuries.
Expert opinions and forecasts
In addition to the New York Fed's probability forecast of a recession based on Treasury spreads, many other organizations make predictions about the possibility of a recession based on other economic data.
The Conference Board
One prominent prognosticator is The Conference Board. This business organization's latest forecast in August 2024 says that "the U.S. is likely not on the cusp of recession." It predicts that GDP will slow in the second half of 2024 but stay in positive territory, and by the end of 2025, growth will climb back slightly above a 2% annual pace, "reflecting achievement of the Fed's 2-percent inflation target, and lower interest rates."
KPMG U.S. CEO survey
The 2024 KPMG U.S. CEO Outlook Pulse Survey asked 100 CEOs at large U.S. companies about their outlooks, and 87% said they're confident in the U.S. economy's growth prospects. Only 4% expect to reduce their workforce, which could be seen as a positive indicator that the labor market will remain relatively healthy and not cause a recession.
Bank leaders
In August 2024, JP Morgan CEO Jamie Dimon told CNBC that he sees a recession as more likely than a soft landing. However, he has been predicting a recession since 2022.
Some other bank leaders see a recession as less likely. David Mericle, chief U.S. economist for Goldman Sachs Research, said in August that recession fears are "likely overblown," and the company's 12-month recession probability of a recession is currently 25%.
Impact of a recession on individuals and businesses
Sometimes recessions are short-lived and don't cause much long-term impact, such as how the U.S. economy quickly bounced back from the 2020 pandemic-induced recession. Other times, however, recessions can last years, such as during the Great Recession, and the recovery can also sometimes take several years.
Some common ways a recession impacts individuals and businesses include the following:
Job market
Recessions tend to coincide with high unemployment, as businesses conduct layoffs to account for lower revenue and growth outlooks.
For those who do hang onto their jobs during recessions, wage growth can be hard to come by, as businesses are often hesitant to increase expenses during difficult economic times. Sometimes employees are even faced with having to take pay cuts to keep their jobs during a recession.
Investment and savings
During recessions, many investments tend to decrease in value, such as the stock market and real estate. Some investments, however, such as some bonds and alternative assets like gold, potentially retain their value or at least don't decline as much during recessions. It depends on the overall economic and market circumstances at the time, though.
Meanwhile, savings often decrease overall during recessions, such as when individuals who get laid off need to use their savings to navigate that period. That said, some individuals increase their savings by tightening their belts due to economic fears.
Business operations
Typically, consumer spending drops during recessions, which can cause businesses to lay off workers, close locations, halt investments, and overall scale back to try to remain as financially stable as possible. Cutting back, however, tends to create a negative cycle, as there's less opportunity for finding jobs and starting new projects, which then makes it harder for spending to increase and for business to pick back up.
Government and policy responses to recessions
When recessions occur or seem likely, there are several government and policy responses that can help reverse the tide, such as:
- Increasing public spending: When businesses pull back, the government often steps in by spending more money to help support employment and get businesses back on track, such as through infrastructure investments, stimulus checks, and increased public sector hiring.
- Loosening monetary policy: When the economy is in trouble, the Fed typically loosens monetary policy, such as by cutting interest rates, to spur more lending and overall business investment
- Industry/job support: Often aligned with increasing public spending, the government might step in to support key industries financially, such as seen with the auto industry bailouts during the Great Recession. Also, the government might fund job training programs to help workers reskill if certain sectors falter.
Preparing for a recession
The financial impact of a recession spreads throughout the U.S. economy, with lower-income families often getting hit the hardest. So, it's essential to prepare ahead of time.
Personal finance tips
Preparing for a recession often requires making sure you have a strong safety net.
"This means having at least a few months' worth of expenses saved up in case you become unemployed and need to search for a new job," Custovic explains. "Also, I highly recommend holding off on any large-scale purchases until economic uncertainty fades."
At the same time, Custovic recommends evaluating any investments you have to make sure you have a good mix of assets to reduce your risk of experiencing massive losses if a few of them underperform.
"Make sure your investments are well diversified and can weather the storm of economic uncertainty," she says.
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Preparing for a recession also often requires emotional preparation in relation to your finances. Recessions can be frightening, particularly for retirees and investors.
"People can make emotional decisions like pulling all cash out of the market when they get scared, and history has proved over and over again this is not the right thing to do," says Custovic.
Business strategies
Business strategies for preparing for a recession often resemble what individuals do, such as trying to keep expenses down, building up a buffer, and diversifying income streams if possible.
One way businesses might try to avoid recessionary problems is by being careful about hiring too quickly so they don't overspend and need to do large layoffs, which can have a negative reputational effect.
Recession Frequently Asked Questions
A recession is a significant period of economic decline, typically where the economy shrinks, not just decelerates. A simple definition of a recession is two consecutive quarters of negative GDP, but many economists view a recession as more widespread, such as also requiring a significant rise in unemployment.
Common indicators of a recession include negative GDP along with rising unemployment, shrinking consumer spending, reduced business investment, and other economic indicators that show the economy is declining.
Since 1854, recessions have lasted an average of 17 months, according to the NBER. That average has been shrinking, but the length can still vary from around a few months to a few years, depending on the severity of the recessions and the responses from governments and others.
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