How Are US Recessions Defined?
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How Are US Recessions Defined?

July 21, 2022 | Brief

Recessions are sometimes summarized as two quarters of negative GDP growth, but the determination actually requires analysis of many factors and the length of a recession could be shorter or longer than two quarters. 

Most experts rely on the guidance of the National Bureau of Economic Research (NBER)** to determine when a US recession has occurred. What matters is a combination of factors – depth, duration, diffusion – and readings from a variety of economic indicators, not just GDP. 

The NBER's traditional definition of a recession is that it is a significant decline in economic activity that is spread across the economy and lasts more than a few months. The NBER’s view is that while each of the three criteria—depth, diffusion, and duration—needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another. 

Depth means how much key economic indicators deteriorate. Diffusion means how broadly the weakness is spread across industries or economic actors (e.g., consumers, businesses, governments). Duration means how long the extreme weakness lasts, which could be several months, quarters, or even years. 

Because a recession must influence the economy broadly and not be confined to one sector, the NBER emphasizes economy-wide measures of economic activity. The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies. 

These include real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production. 

There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions. In recent decades, the two measures the NBER has put the most weight on are real personal income less transfers and nonfarm payroll employment. 

For more about how the NBER determines recessions and business cycles see Business Cycle Dating

** The National Bureau of Economic Research (NBER) is a private, nonpartisan organization that facilitates cutting-edge investigation and analysis of major economic issues. It disseminates research findings to academics, public and private-sector decision-makers, and the public by posting more than 1,200 working papers and convening more than 120 scholarly conferences, each year. It is also the recognized authority for determining US business cycles (i.e., peaks and troughs), and economic expansions and recessions.