When is this officially called a recession?


Key learning points

  • Two consecutive quarters of negative GDP growth are typically used as a shorthand definition for a recession.
  • The National Bureau of Economic Research (NBER), the entity responsible for declaring recessions, uses several factors to determine when there is a recession.
  • Measures such as real personal income and unemployment rates are critical to deciding whether we are in a recession.

The average recession has historically lasted about 17 months, according to NBER data. While the NBER hasn’t formally declared a recession yet, it feels like people have to talk about one for at least 17 months now.

Those discussions gained momentum last summer when we learned that the US had officially experienced two consecutive quarters of negative GDP growth.

While negative GDP growth can coincide with a recession, an official explanation is far more complex than any measure. Instead, a recession relies on the sum of many economic indicators that show how the economy is doing. To know when this downturn will be officially declared a recession, we need to understand what a recession actually means.

What is a recession?

A recession, according to the NBER, is a period of significant economic downturn that lasts longer than a few months. However, the agency relies on more than just one measure to make that call, such as GDP growth. Instead, it looks at the economy as a whole, weighing factors such as real personal income (RPI), employment, consumption, retail sales, and manufacturing.

The NBER also says there is “no hard and fast rule about which measures information contributes to the process or how it is factored into our decisions.” In other words, every set of economic conditions is different and there is no specific threshold that must be met before declaring a recession.

However, the NBER does say that the two factors that the NBER has weighed most heavily in recent decades have been RPI and employment. This may be why the agency officially declared a recession between February 2020 and April 2020. By April 2020, the unemployment rate had reached 14.7%. Fortunately, unemployment fell sharply after that and there has been no recession since.

Certainly, there have been other reasons for concern since then. Negative GDP growth and rising inflation have shaken many people’s confidence in the economy. But these are not the main factors the NBER uses in its decision whether or not to declare a recession.

When does a recession become official?

We cannot be sure that the current economic conditions will lead to an official recession. Still, it is inevitable that a recession will be declared in the future.

First, the unemployment rate has remained low – 3.7% as of August 2022. And RPI, defined as income after factoring in inflation, has been rising steadily in recent years. The pandemic did cause some volatility in RPI, but that settled down in the summer of 2021. Since then it has remained stable. On average, the RPI has increased over the past five years.

Because the NBER uses many factors to arrive at a decision, we can’t say for sure when – and if – the current economic conditions will form a recession. Some economists do expect a recession; a survey of economists found that 68% believe there will be a recession in 2023.

But even if a recession is doing starting in 2023, it’s unlikely we’ll know anything official for a while. The NBER does not always deliver these reports on time. For example, it didn’t release its report on the COVID-19 recession until July 2021. We can even go back to the Great Recession, which the NBER didn’t announce until September 2010.

How long do recessions last?

Measuring the typical length of a recession is slightly easier. As mentioned earlier, from 1854 to the present, the average recession has lasted 17 months. In the years leading up to the Great Depression, however, the average recession lasted more than 21 months. Since the Second World War, they have lasted on average just over 10 months.

Still, there have been plenty of outliers. The COVID-19 recession was the shortest-ever recession in the US, lasting just two months. In the years following the Civil War, there was a recession that lasted 65 arduous months. The Great Depression lasted 43 months.

it comes down to

There has been talk of a possible recession for some time. Those talks only gained momentum when the US experienced two consecutive quarters of negative GDP growth. But the NBER, which declares recessions, favors measures such as real income and unemployment rates.

Thus, the NBER has yet to declare a recession since the COVID-19 recession of 2020. While some economists predict a recession in 2023, it is pure speculation whether the NBER will explain it. The agency is also usually quite late in declaring recessions, so it could be a long time before we hear an official decision. And modern recessions tend to last shorter, closer to 10 months than the historical averages lasting 17-20 months.

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