The economic recession definition used in the United States comes from the National Bureau of Economic Research, whose Business Cycle Dating Committee identifies recessions as a significant decline in economic activity spread across the economy and lasting more than a few months. The committee dates recessions after the fact, using several monthly indicators rather than a single GDP rule.
Key Takeaways
- The NBER’s Business Cycle Dating Committee maintains the official chronology of U.S. business cycle peaks and troughs.
- The NBER defines a recession as a significant decline in economic activity, spread across the economy, that lasts more than a few months.
- The popular “two consecutive quarters of falling GDP” rule is not the NBER’s definition.
- In recent decades, the committee has relied most heavily on real personal income less transfers and nonfarm payroll employment.
- According to the NBER chronology, the most recent recession ran from a February 2020 peak to an April 2020 trough.
- The committee typically announces peaks and troughs months after they occur, to avoid major revisions.
The Official Economic Recession Definition Comes From the NBER
When people ask what a recession is, the answer that carries official weight in the U.S. comes from the National Bureau of Economic Research. Its Business Cycle Dating Committee maintains a chronology of U.S. business cycles, identifying the months when economic activity peaked and bottomed out.
The NBER’s definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. Each part of that definition matters, and the committee treats them as a set rather than a checklist.
Depth, Diffusion and Duration
The committee describes three criteria: depth, diffusion and duration. It treats them as somewhat interchangeable. Each must be met to some degree, but extreme conditions on one can partially offset weaker signals from another.
The 2020 downturn shows how that works. For the February 2020 peak, the committee concluded that the drop in activity was so large and so widespread that, even if it proved brief, the downturn should be classified as a recession.
Why Two Quarters of Negative GDP Is Not the Official Rule
The financial press often defines a recession as two consecutive quarters of decline in real GDP, a shorthand frequently called a “technical recession.” The NBER has said its procedure differs from that rule in a number of ways.
One key difference is depth. The NBER’s definition includes the phrase “a significant decline in activity,” so the size of a downturn matters, not just its direction. The committee also leans on monthly data rather than quarterly figures, which allows it to date turning points more precisely. The NBER further describes a recession as a period of diminishing activity rather than diminished activity, a distinction that separates the decline itself from the low point it leads to.
The Recession Indicators the NBER Watches
Because a recession must affect the economy broadly rather than a single sector, the committee focuses on economy-wide measures published by federal statistical agencies. These include real personal income less transfers, nonfarm payroll employment, employment measured by the household survey, real personal consumption expenditures, real manufacturing and trade sales, and industrial production.
There is no fixed formula for how those measures are weighted. In recent decades, the committee has relied most heavily on two: real personal income less transfers and nonfarm payroll employment. For quarterly dating, it also weighs both the expenditure-side and income-side estimates of real GDP, which are not available monthly.
Peaks, Troughs and the Business Cycle
The NBER’s chronology divides the economy into two phases. Expansions run from a trough to a peak, and recessions run from a peak to a trough. By convention, the peak month is the last month of an expansion, and the trough month is the last month of a recession.
Why Recession Announcements Come Months Later
The committee’s approach is retrospective by design. It waits until enough data are available to avoid major revisions to its chronology, and it does not declare a peak until it is confident a recession has occurred. As a result, peaks are typically identified a number of months after they actually happened, and troughs are announced only once the committee is confident an expansion is underway.
That lag explains why recession debates often play out in real time before any official call. By the time the committee announces a turning point, the economy may already have moved past it.
How Long Recessions Last
The NBER describes expansion as the normal state of the economy and notes that most recessions are brief. The most recent recession, running from a February 2020 peak to an April 2020 trough, illustrates how short a recession can be. The NBER adds an important caveat: the time it takes for the economy to return to its previous peak level of activity can be much longer than the recession itself.
Disclaimer: This article is for informational purposes only and does not constitute financial, investment or economic advice. Readers should consult a qualified professional before making financial decisions.
FAQs
What is the economic recession definition?
In the U.S., the NBER defines a recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months. Its committee weighs depth, diffusion and duration together.
Who declares a recession in the United States?
The National Bureau of Economic Research’s Business Cycle Dating Committee determines the official peak and trough dates of U.S. business cycles. It announces those dates retrospectively, often months after they occur.
What is a technical recession?
A technical recession is a common shorthand for two consecutive quarters of declining real GDP. It is not the NBER’s official definition, which considers a broader set of monthly indicators and the depth of a decline.
What indicators does the NBER use to identify a recession?
The committee looks at measures including real personal income less transfers, nonfarm payroll employment, household-survey employment, real consumer spending, real manufacturing and trade sales, and industrial production. In recent decades, it has relied most heavily on income less transfers and payroll employment.
When was the last recession in the U.S.?
According to the NBER chronology, the most recent recession began after a February 2020 peak and ended with an April 2020 trough.
