Part 1: What is a Recession and What Does It Mean to Us?

The first of our two part blog will focus on what a recession actually is and then our follow up will talk about the implications.

Defining a recession, and then  understanding if we are actually in one, should be easy, right?  Uh, not so much….

When all of us took macroeconomics in school, the textbook definition of a recession was “ a two consecutive quarter decline in gross domestic product (GDP)” along with some other monthly economic signals, like rising unemployment.  This definition was relatively straightforward and easy to measure.  Either we have two consecutive quarters of GDP decline or we don’t.  Even I could almost figure this out. 

Now however, a recession must actually be “declared” by the National Bureau of Economic Research (NBER).  The word “recession” is defined by NBER and Investopedia as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income and employment, industrial production, and wholesale-retail sales.”   At least now we understand why there is a question about whether or not we are in a recession AND why there is some debate week in and week out about it, even now. 

Normally the NBER looks at certain monthly economic indicators to determine if we are in a recession rather than waiting for two quarters of GDP decline.  The NBER officially declared a recession in February 2020.  Historically, recessions have been caused by financial factors, economic factors and/or psychological factor or by structural shifts in industries – like oil price changes or new breakthrough technologies.  There is little doubt among economists that we have had a severe economic downturn, caused by the COVID-19 epidemic.  What experts are still debating is whether we are now in a short term period of economic recovery, a long term period of economic recovery growth or a plateau.  Of course as we all know, by the time we get to Part 2 of this Blog, the economy could be in a completely different phase. 

It's been 10 years since our last declared recession.  And although we all realize that recessions are a normal part of the business cycle, that doesn’t make it any easier.  We were absolutely due for an economic downturn, but this one came on quickly and violently, and is greatly exacerbated by the real fear of the COVID-19 virus. 

Next up:  What are the implications of a recession to us as investors?