What a recession is, and how it is measured
A recession is a broad, lasting drop in economic activity. Here is how it is defined in the US and Canada, and what it tends to mean for markets.
A recession is a period when the economy shrinks instead of grows. Businesses sell less, fewer people are hired, and unemployment usually rises. Recessions are a normal part of the economic cycle, but they can be hard on households and investors.
The quick rule of thumb
The most common shortcut is two quarters in a row of shrinking GDP. GDP, or gross domestic product, is the total value of goods and services an economy produces. A quarter is three months.
This rule is easy to remember, but it is only a rule of thumb. It is not the official definition in either the US or Canada.
How the US decides
In the US, recessions are dated by the National Bureau of Economic Research, or NBER, a private, non-profit research group. Its committee defines a recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months.
The NBER looks at many measures, not just GDP. These include jobs, income, consumer spending and industrial production. It usually announces a recession's start date months after the fact.
How Canada decides
In Canada, a recession is often described as two quarters in a row of shrinking GDP. The more formal call is made by the C.D. Howe Institute's Business Cycle Council, a group of economists. Like the NBER, it looks at how deep, how broad and how long the decline is, not just at GDP alone.
What causes recessions
There is no single cause. Common triggers include:
- High interest rates. Central banks such as the Federal Reserve and the Bank of Canada raise rates to fight inflation, which can slow spending too much.
- Financial shocks. A banking crisis or a sharp fall in house prices can cut lending and spending.
- Sudden events. A pandemic, war or energy price spike can disrupt the economy quickly.
What recessions mean for markets
Stock markets often fall before or during a recession, as investors expect lower profits. But markets look ahead. They have often started to recover before the recession was over, and sometimes before it was even officially declared.
Bond yields often fall in a recession, as investors expect central banks to cut rates and look for safer places to put money.
Why the word is tricky
Because recessions are confirmed late, people often argue about whether one has started. That is why investors watch many signals, such as jobs reports, consumer spending and bond yields, rather than waiting for a formal call.
The short version
- A recession is a broad, lasting drop in economic activity.
- "Two quarters of shrinking GDP" is a common rule of thumb, not an official definition.
- The NBER dates US recessions; in Canada the C.D. Howe Institute's Business Cycle Council makes the formal call.
- Stock markets often fall ahead of recessions and can recover before they end.
This is general information, not investment advice.
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