Eleven questions about recessions and who decides when one has started

Here is a strange fact about the most feared word in economics: in the United States, no government agency is in charge of saying when a recession begins. A small committee of economists at a private, nonprofit research organization makes the call, usually long after you have already lost your overtime or your bonus. Meanwhile the television declares a recession whenever it needs a ratings bump, and politicians insist on one definition when the other party is in power and another when it is their own.

So let us define the terms, then take the questions one at a time. The answers below are plain and exact, because a worried family deserves a straight reply before it deserves anyone's spin.

The definition and the referee

1. What is a recession, in plain words?

A recession is a broad, significant decline in economic activity that spreads across the economy and lasts more than a few months. That is close to the working definition used by the body that makes the official call, the National Bureau of Economic Research. Three words in that sentence do the work: significant, spread, and lasts. A bad month in one industry is not a recession. A sharp drop in one region is not a recession. A recession is a downturn that is deep enough, wide enough and long enough to show up in jobs, income, spending and production at the same time.

Notice what the definition leaves out: there is no number. No threshold of 2 percent, no required count of quarters. That is deliberate, and it is the source of most of the confusion.

2. Who decides when a recession has started?

The NBER's Business Cycle Dating Committee. The National Bureau of Economic Research is a private, nonprofit research organization founded in 1920. Its dating committee is a small group of academic economists who examine the data and announce the months in which the economy reached a peak, which is the start of a recession, and a trough, which is the end.

This is not a government verdict. Congress did not create the committee, and no statute gives its dating any legal force. It carries weight because it has been careful and consistent for decades, and because everyone from Wall Street to the White House treats its dates as the record. If you want to see its work, the NBER publishes a table of U.S. business cycle expansions and contractions on its website. That table is where to check, rather than a headline.

3. What does the committee actually look at?

It looks at a range of indicators, not one. Its public statements emphasize measures of the whole economy, in particular:

• real personal income, excluding government transfer payments,
• nonfarm payroll employment,
• real personal consumption expenditures,
• real manufacturing and trade sales,
• industrial production,
• and the broad output measures, gross domestic product and gross domestic income, which add up the economy from two different directions.

The committee has said it does not use a fixed formula or a fixed weighting. It looks at depth, how widely the decline spreads, and duration, and a strong signal in one dimension can make up for weakness in another. That explains why a very short, very deep collapse can still count, as 2020 showed.

The two-quarter rule

4. Is a recession really "two quarters of falling GDP"?

No, though the rule has a real origin. Gross domestic product, GDP, is the total value of goods and services produced, reported by the Bureau of Economic Analysis every quarter. The popular rule of thumb says that if real GDP, meaning adjusted for inflation, shrinks for two consecutive quarters, the country is in recession.

The rule of thumb is useful, because a recession usually does include falling output for a while. But it is a rule of thumb, not the definition. GDP is only one measure. It is revised several times after it first appears, so a decline that shows up in the first estimate may disappear later, and a decline may be missed. And two quarters of decline can occur without a broad downturn in jobs and income, while a recession can occur without two straight quarters of negative GDP.

5. What happened in 2022, when people argued about the rule?

It is the best illustration of the problem. The first estimates of real GDP showed declines in both the first and second quarters of 2022, and commentators began to say the nation was in a "technical recession." At the same time, the labour market was very strong: unemployment was low and employers were adding jobs at a rapid clip. The administration of the day argued that two negative quarters did not make a recession, citing the strong job market, and pointed to the NBER's broader approach. Critics replied that the administration was moving the goalposts, and Treasury Secretary Janet Yellen said in late July that two negative quarters is a common definition of a recession.

Both sides had a point, and both sides were selective, which is what usually happens when the label becomes a political weapon. The committee did not date a recession in 2022. Later data revisions by the Bureau of Economic Analysis changed the picture of those quarters, which is itself a lesson: the first number is a draft. If you want to see the current estimates, the BEA's website has the revised tables.

The fair conclusion is that a rule of thumb is a shortcut, and a shortcut should never be used as a weapon by either party. Look at jobs, income and output together.

Timing, warnings and history

6. Why does the official call come so late?

Because the committee wants to be right, and the data arrive slowly and get revised. The committee does not announce a peak until the evidence is clear that a significant decline has begun, and that takes months. Two examples show the lag.

The recession that began in December 2007 was not announced by the committee until December 2008, a year after it began. The recession that began in February 2020 was announced in June 2020, much faster, because the collapse was so sudden and so enormous that the evidence was unmistakable within weeks.

The lag has a practical meaning. By the time the committee says a recession has started, the downturn is already well underway, and by the time it declares the end, the recovery has long since begun. The call is a historian's tool, not an early-warning system. A family should not wait for it.

7. What are the best early warnings, then?

No single signal is reliable, but economists watch several. The monthly jobs report from the Bureau of Labor Statistics, which comes out on the first Friday of most months, reports payroll employment and the unemployment rate. Initial claims for unemployment insurance are published weekly. Retail sales, industrial production and consumer spending arrive on regular schedules.

One widely discussed rule of thumb is the Sahm rule, named for economist Claudia Sahm: when the three-month average of the unemployment rate rises half a percentage point or more above its lowest three-month average of the previous twelve months, a recession has often been under way. It is a rule of thumb about the labour market, not a law of nature, and it has had misses and false alarms in unusual periods, so treat it as a flag rather than a verdict. For a clear explanation of how to read the jobs numbers themselves, see the site's pages on the economy and employment.

8. How long have recessions lasted since 1945?

Here are the NBER's dates for the postwar downturns that matter most to a family's sense of how bad it can get.

• 1973 to 1975: November 1973 to March 1975, about 16 months, in the era of the oil embargo and high inflation.
• 1981 to 1982: July 1981 to November 1982, about 16 months, during the Federal Reserve's campaign to break the inflation of the 1970s.
• 1990 to 1991: July 1990 to March 1991, about 8 months.
• 2001: March 2001 to November 2001, about 8 months.
• 2007 to 2009: December 2007 to June 2009, 18 months, the longest of the postwar period and the one that followed the housing and financial crisis.
• 2020: February 2020 to April 2020, 2 months, the shortest on record, caused by the sudden shutdown of the economy.

The postwar record shows that the average recession is much shorter than the average expansion. Expansions have often lasted for years, and in the 1990s one ran for a full decade. That is worth saying to anyone who has lived through one painful stretch and concluded that the country is always in trouble. It is not. But it is also worth saying to anyone who believes recessions can be abolished: they cannot, and a policy that promises to end the business cycle will end in disappointment.

What the Fed and Congress do

9. What does the Federal Reserve do in a recession?

The Federal Reserve's main tool is the short-term interest rate it targets, the federal funds rate. In a downturn, it usually cuts the rate to make borrowing cheaper and encourage spending and investment. When rates are already near zero, as they were after 2008 and in 2020, the Fed has also bought large amounts of government and mortgage securities, which is called quantitative easing, to push longer-term rates down. It also acts as a lender to the banking system in a panic, which is the original purpose of a central bank.

The Fed's mandate, set by Congress in 1977, tells it to pursue maximum employment and stable prices. Those can conflict in a downturn, which is the subject of The Fed's dual mandate and the 1977 law that gave it two masters. And there is a conservative case that easy-money policy can sow the next bubble: a point that The 2008 housing crash began with Washington's push for easy mortgages explores for the crisis of 2008.

10. What does Congress do in a recession?

Congress has three kinds of responses. The first is automatic. Unemployment insurance payments rise as people lose jobs, and tax revenue falls as incomes fall, and both cushion the blow without any new law. Economists call these automatic stabilizers. The second is discretionary: Congress can pass new spending or tax cuts. That is what stimulus legislation is. The third is to extend or expand existing programs, such as longer unemployment benefits.

The conservative question is not whether to respond, but how. The honest debate is about whether large, temporary spending packages work as promised, because they take time to write and to spend, and are often aimed at a downturn that is already ending. the 2009 stimulus promised unemployment under 8 percent, then came 10 looks at one major test of that claim. And there is a warning built into the arithmetic of any response: a government that borrows heavily in a downturn must pay it back, or carry the interest, in the next good year. You can see where that stands on the national debt clock.

What a family can do

11. How can a family prepare, in general terms?

What follows is general education, not advice about your own finances; your situation depends on facts only you know, and you should talk to a qualified professional about it. With that said, the ideas that nearly every financial educator agrees on are few and old.

• Know your fixed obligations. List the payments that cannot be skipped: housing, utilities, insurance, debt service, food. That list tells you how long your savings would last if income fell.
• Build a cash cushion over time. Many educators suggest several months of essential expenses held in an easily accessible account. The right number depends on how stable your income is and how many people depend on it.
• Be careful with variable-rate and high-interest debt. Debt payments are the one expense that does not shrink when your paycheck does.
• Keep your skills current and your network warm. The best protection against a layoff is the ability to find the next job quickly.
• Do not make large, irreversible decisions in a panic. The recessions on the list above all ended. Decisions made at the bottom of a scare are usually the ones people regret.

Inflation complicates every one of these, because it erodes a cash cushion even as it sits in an account. For how that works, see inflation hurts the poor most, and the arithmetic of a fixed paycheck.

What the argument over the label is really about

Notice who benefits when the label changes. A party in power wants the word "recession" to apply to as few months as possible, and a party out of power wants it applied to as many as possible. A reporter wants the word because it is a headline. An economist wants the word to mean something exact because exactness is what makes it useful.

The conservative interest here is the same as the family's: get the facts before the framing. The Founders designed a government to answer to evidence and to voters, and the way a voter answers is by looking at the underlying data, the jobs report and the BEA tables, and ignoring the label. The NBER's committee has a reputation for caution and independence, and that reputation is worth protecting. It would be a poor outcome if the dating of recessions were ever turned over to an agency whose director is appointed and removable by whichever party holds the White House.

And one more thing on the economics. A recession is not a failure of the free market that only government can repair. It is part of the way an economy corrects. Resources that were being used on projects that were not worth what they cost are released, and capital and labour move to better uses. That process is painful for those who lose their jobs along the way, and policy should be generous in cushioning the human cost without freezing the correction in place. For the larger idea, see Creative destruction, why the buggy whip makers lost and America won and profit is a signal, not a sin, and what a loss tells a company.

The case in brief

1. A recession is a significant, widespread and lasting decline in economic activity, and the official call is made by the NBER's private Business Cycle Dating Committee, not by a government agency or a news anchor.
2. The two-quarter rule of falling GDP is a rule of thumb. The 2022 debate showed that it can mislead when the labour market tells a different story, and that first GDP estimates are revised.
3. The official dates come months late, so a family should watch the jobs report, unemployment claims and other direct signals instead of waiting for a label.
4. Postwar recessions have lasted from 2 months to 18 months and are far shorter than expansions, but they are real, and policy responses by the Fed and Congress carry costs that must be weighed honestly.
5. Preparation is mostly old, plain habits: know your fixed costs, build a cushion, avoid expensive debt, and do not decide in panic.

What you can do: open the NBER's table of business cycle dates and the Bureau of Labor Statistics' latest jobs report, read both for yourself, and share the one thing you learned with someone who still believes a recession means two bad quarters.