What Is a Recession? What Business Owners Need to Know.

A recession refers to a significant and long-lasting decline in economic activity, often signaled by negative GDP, elevated unemployment, declining retail sales, and diminishing economic output.

Recession is a natural stage of the economic cycle: it’s a contraction after periods of growth or events like bubbles, crashes, or pandemics.

How Often Do Recessions Occur?

Including the recession we’ll most likely slip into this year (the conference board pegs the likelihood of a recession at 96%), the U.S. economy has officially gone into recession 13 times since 1933, approximately every seven years. CNBC identifies the following recessions:

BTW, this list demonstrates the economy’s collective ability to bounce back, like in the 1980s after the energy-fueled recessions of the 1970s, and in the late 2000s after the dot-com recessions that kicked off the millennium. It also shows that recessions don’t last forever and frequently are officially over just a few months after they start.

How Are Recessions Defined?

In a New York Times article from 1974, then Commissioner of the Bureau of Labor Statistics Julius Shiskin proposed four indicators of recession:

• Two consecutive declining quarters of the gross national product (GNP)
• Six months of declining industrial production
• A two-point rise in unemployment (minimum of 6%)
• Six months of declining non-agricultural employment in 75% of industries

Shiskin’s definition of a recession has since been filtered down to just two consecutive declining quarters of gross domestic product (GDP), which is how many experts define a recession.

However, in July 2022, The White House posted an article “How Do Economists Determine Whether the Economy Is in a Recession?” contradicting Shiskin’s rules-of-thumb for determining recessions, stating that “while some say two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle.” 

It goes on to support the definition of recession by the National Bureau of Economic Research (NBER), which defines a recession as a significant decline in economic activity spread across the economy and lasting more than a few months.

Compared to Shiskin’s criteria, NBER’s is more holistic to afford more latitude. It’s intentionally vague, allowing for more data and consideration of other economic variables without fixed rules or thresholds.

Who Determines If/When We Are/Were in Recession?

Since 1978, the job has been tasked to a small committee of 8 hand-selected economists with expertise in macroeconomics and business cycle research. The committee is called the Business Cycle Dating Committee (BCDC), a subset of the NBER. 

You’ll find updated information about the active Dating Committee members at NBER.

The committee’s responsibility is less about classifying a recession and more to identify the peaks and troughs of an economic cycle—which inherently signals a recession. 

To spot these trends, the BCDC aggregates real economic statistics and data from federal agencies, such as:

• Real personal income less transfers (PILT)
• Nonfarm payroll employment numbers
• Employment measured by household
• Real personal consumption expenditures
• Wholesale-retail sales adjusted for price changes
• Industrial production reports

BCDC does publish its full data set, but provides no additional context as to how each measurement is weighted or used in its analysis.

Because the BCDC’s job is to identify economic inflection points, they don’t rush to announce a recession or expansion. Instead, the committee assesses and deliberates the findings over extended periods before announcing any contraction (recession) or expansion date. 

For example, following the housing market crash in 2007-2008, the BCDC released its designation on November 28, 2008, that the U.S. had entered a recession in December 2007—almost 12 full months afterward.

Why Does It Matter If a Recession Is Official?

Do all businesses feel the pain of a recession? No. In fact, during the Great Recession, a number of big brands that we can’t imagine life without today gained the traction they needed to become household names. Read 4 Secrets of Recession-Proof Businesses.

Truthfully, it doesn’t really impact much if a recession is ever officially declared. What does matter is how businesses and consumers navigate the economy, whether it’s at a high or a low. Whenever you’re finding customers and/or opportunities harder to come by and you’re noticing your monthly revenue slip as a result, it’s time to respond. 

How? One way is to double down on building your brand, which you’d have time to do while the economy sorts itself out. Two good reasons for this:

• Taking action will keep you too busy to freak out over a situation that is out of your control.
• As John Quelch, University of Miami’s Dean of Business School notes, “it’s well documented that investing in your business during a recession while competitors are cutting back can yield a greater ROI at a lower cost than investing in your business during good times.” 

Another way is figuring out how to get money while revenues are down. You can read more about that here.

_{The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our bloggers or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything. The information provided in this post is not intended to constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.}