What Is a Recession and Are We in One Now?

As the stock market declines and the Fed hikes rates, recession fears are rising. Here’s what to know.

By Josh Mitchell The Wall Street Journal

With inflation high, the Fed raising interest rates, stock markets in bear territory and growing concerns over stagflation, “recession” is yet another economic worry to add to the list. The specter of a recession is looming over economists and chief executives. “For many countries, recession will be hard to avoid,” World Bank President David Malpass said in early June. Though recessions can be painful and scary, they are a natural feature of the economy. Don’t panic. Here’s what you should know.

What is a recession?

There’s no precise definition. Instead, the task of identifying recessions is left to a little-known panel at the National Bureau of Economic Research, a nonprofit academic group. A recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months,” NBER said on its website. Even that definition is loose because NBER ultimately declared the 2020 downturn at the start of the Covid-19 pandemic a recession even though it lasted only a few months. Recession dates are determined by NBER’s Business Cycle Dating Committee, consisting of eight economists at universities around the U.S. They typically make the determination months or even years after a recession ends. Think of the panel as a coroner performing an autopsy—it doesn’t make assessments in real time but instead sifts through data to retroactively determine when expansions end and recessions begin. The NBER has identified 12 recessions dating back to 1948, or one approximately every six years.

What criteria does the committee use?

household income, consumer spending, retail sales and industrial production. The panel considers those figures in tandem. No one figure necessarily stands above the others, said Stanford University’s Bob Hall, the Business Cycle Dating Committee’s chairman. Mr. Hall said the committee generally knows a recession when it sees one. Most typically include sharp drops in output and employment. The tough part is determining just when it started and ended—a task the committee carries out ever so carefully. That’s why the committee waits a while to identify the dates; it wants all possible data to have been collected and finalized. “Every time when we ultimately called a recession, there wasn’t any doubt,” Mr. Hall said.

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Is two consecutive quarters of falling GDP a recession?

No. That’s a rule of thumb that sometimes appears in news articles and, according to the International Monetary Fund, is used by many analysts and commentators around the globe. But, in the U.S., it has no bearing on the committee, Mr. Hall said. The pandemic-induced downturn lasted just a few months but certainly qualified as a recession in the committee’s eyes because of its severity, he said. Alternatively, a modest decline in output over six months would likely not meet the panel’s definition because the panel only considers “significant” declines in economic activity. “That’s not anything close to the philosophy the committee brings to identifying it,” Mr. Hall said of the rule of thumb. “It really doesn’t make any sense.”

How deep and long are recessions?

That varies. Recessions are like snowflakes—no two are exactly alike. The recession that began in 2007 after the housing crash lasted a year and a half. The pandemic-induced

recession that began in early 2020 lasted a few months. They also vary considerably in depth: Employment fell 14% in 2020 and about 6% from 2008 to ‘09, but only about 1% in 1980. The unemployment rate peaked at 14.7% in 2020, 10.8% in 1982, and 10% in 2009, but just 5.7% in 2001.

What’s the difference between a recession and a depression?

A depression is “a more severe version of a recession,” said the San Francisco Fed. During the Great Depression, from 1929 to 1933, inflation-adjusted output fell nearly 30% and the jobless rate hit nearly 25%, according to a speech by former Fed Chairman Ben Bernanke. However, the NBER said it doesn’t differentiate between recessions and depressions.

If GDP falls but employment rises, is that a recession?

Such a situation is unlikely to arise: Employment typically falls during recessions as companies lay off workers and stop hiring until the outlook improves. But the question has gained new relevance: Employment has risen strongly through the first five months of this year, yet GDP contracted in the first quarter and the Atlanta Fed’s GDPNow tracker projects 0% growth for the second quarter. This has a few economists ringing the alarm bells. “I think the odds that the U.S. is already in a recession have risen, and this is now our base-case scenario,” said Sébastien Mc Mahon, chief economist at Industrial Alliance Investment Management Inc. in Quebec City, Canada, citing those GDP figures. “I think we should expect GDP growth to zigzag around the 0% level for a few quarters, meaning we could even have a few technical recessions in a row before 2023 is over.” Mr. Hall said he couldn’t speculate on whether the U.S. is currently in recession, pointing to the committee’s policy of not commenting on such matters until after panelists have scrutinized the data and made an official determination. “We don’t get involved in hypotheticals for things that haven’t happened yet,” he said.

Is a bear market in stocks a sign of recession?

Not necessarily. A sharp drop in the stock market often coincides with recessions, but not always. The best counterexample is 1987, when the stock market crashed in October but the economy continued to grow steadily.