THREE THINGS TO KNOW ABOUT RECESSIONS

If the U.S. economy enters a recession, the causes and potential outcome will be hotly debated. At LPL Research, our starting point is always looking at history. This week’s commentary will remind us of three things we know about historical recessions.

TECHNICAL DEFINITION

First, a recession has an important technical definition that’s different than what many people think. Earlier this year when Gross Domestic Product (GDP) growth was negative, many were under the false impression that two consecutive quarters of negative GDP make a recession. Often that view is a good general approximation but not the technical definition. The National Bureau of Economic Research (NBER) is the official arbiter of U.S. business cycles, and they consider a wide range of economic indicators other than just the quarterly GDP metric. The official definition of a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” 1 Now for most investors, this definition does not sound very specific and raises questions about things like the meaning of “significant.”