Recession

What is a recession?

A recession is a broad contraction in economic activity, not simply a weak stock market or one disappointing GDP report. In the United States, the National Bureau of Economic Research evaluates the depth, breadth, and duration of a decline before dating a business-cycle peak and trough.

Is a recession two negative GDP quarters?

Two consecutive quarters of falling real GDP are a popular shortcut, but they are not the official U.S. definition. The NBER examines multiple monthly and quarterly measures, including payroll employment, real personal income, industrial production, consumer spending, and both real GDP and real gross domestic income. The 2001 recession, for example, did not contain two consecutive quarters of falling real GDP.

Recession indicators investors watch

Indicator	Typical recession signal	Important limitation
Payroll employment	Broad, persistent job losses	Employment usually weakens after other activity
Real income	Inflation-adjusted household income falls	Transfers can temporarily distort the measure
Industrial production	Factory, mining, and utility output contracts	Manufacturing is a smaller share of the modern economy
Consumer spending	Real consumption weakens broadly	Services and goods can move differently
GDP and GDI	Economy-wide output and income decline	Early estimates are revised
Credit conditions	Lending standards tighten and defaults rise	Tight credit can precede or follow the downturn

No indicator works as a perfect real-time switch. Recessions are normally identified only after enough evidence exists to separate a genuine contraction from monthly noise.

What happens to stocks during a recession?

Stocks discount expected future earnings, so they can decline before a recession is officially dated and recover before the economy reaches its trough. Cyclical companies, highly leveraged businesses, and firms dependent on discretionary spending are often more exposed. Defensive sectors may hold up better, but valuation, interest rates, and the cause of the recession still matter.

A recession does not automatically mean every stock falls. Easier monetary policy, improving inflation, or expectations of an approaching recovery can support markets while reported economic data remain weak.

Recession versus bear market

A recession describes the economy. A bear market usually describes a decline of at least 20% in a market index or asset. They often overlap, but neither requires the other. A valuation correction can produce a bear market without a recession, and a mild recession can occur without a 20% index decline.