How Recessions Work

Spotting a Recession

In the United States, the economy follows a somewhat regular pattern of expansion and contraction. The economy will typically expand steadily for six to 10 years and then enter a recession for six months to two years. The point where the recession begins is known as a peak, and the point where it ends as known as a trough. Following the trough, the economy expands again toward another peak. Economists call the period of time between two peaks a business cycle.

When the nation is in the early part of a recession, nobody knows for sure if it is actually a recession or not. The economy might turn around the next day, which would mean the contraction was just a temporary decrease in activity along a mostly upward track. Economists don't know if the economy is in recession until they can gather data over an extended period of time -- typically six months or more.


There is no strict definition for recession. Different people consider different factors when making the assessment.

Some economists and journalists define a recession as two consecutive quarters (three-month financial periods in the year) in which the gross domestic product (GDP) decreases. The GDP is the value of all the reported goods and services produced by people and institutions operating in a country. An overall decrease in the value of goods and services indicates that demand has decreased in most markets. If this is the case, it's a good bet that companies have laid people off, so unemployment is up. Usually the stock market is also in bad shape when overall value is decreasing. In general, the GDP is a pretty good indicator of the overall state of the economy.

But the economists who officially designate a recession in the United States do not rely on the GDP alone. By general agreement, the official determination of recession is left to the Business Cycle Dating Committee at the National Bureau of Economic Research (NBER). The NBER is not a government agency; it is a private organization that works to further understanding of the economy. This non-profit, non-partisan organization employs hundreds of economy experts (university professors, mostly) to analyze and report on the U.S. economy.

Among other things, NBER economists keep track of the nation's business cycles -- the courses of expansion and contraction in the economy. The Business Cycle Dating Committee decides whether or not the economy is in recession based on several monthly indicators. The GDP is not the most important factor to the NBER economists. They give more weight to personal income, the national employment rate, sales in manufacturing and trade, and industrial production.

Since it is unhealthy for a nation to be in recession, governments will generally take action to get the economy expanding again. In the next section, we'll look at the common remedies employed by the U.S. government in times of recession.