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The Definition of a Recession

You have probably heard the saying "a recession is two consecutive quarters of negative GDP" in the news. But what if this is not actually the official definition?

The Most Common Misunderstanding: Two Consecutive Quarters of GDP Decline

The criterion most often used when explaining a recession is that "if real GDP records negative growth for two consecutive quarters (six months), it is a recession." Because it is simple and intuitive to calculate, it is widely used as a "rule of thumb" in the media and textbooks.

But this is only a rule of thumb for convenience; it is not any country's official definition. In fact, the institution that officially determines recessions in the U.S. does not use this two-quarter rule as-is.

The U.S. Official Arbiter: the NBER's Multi-Indicator Approach

The body that officially declares whether the U.S. is in recession is not the government but a private research organization called the NBER (National Bureau of Economic Research).

The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months to over a year." That is, it does not look only at GDP but synthesizes several monthly indicators — employment, personal income, industrial production, consumption, and so on — to determine the economic "peak" and "trough."

The key is that it looks at three things together: "depth (how far it fell)," "diffusion (whether it spread across the economy)," and "duration (how long it lasted)."

The NBER usually determines recessions after the fact. Because it announces the peak and trough dates only after enough data have accumulated, recessions are often officially declared "after they have already begun" or "after they have ended."

Actual Cases Where the Two Definitions Diverged

The two-quarter rule and the NBER determination have diverged several times.

① The 2020 COVID recession: by the NBER's criterion it was just 2 months (February–April 2020), and the quarter in which GDP dropped sharply was in effect short. Had you waited for "two consecutive quarters," you would have missed the recession.

② The 1980, 1991, and 2001 recessions: real GDP was negative for only a single quarter, yet the NBER still ruled them recessions.

③ The first half of 2022 (U.S.): GDP was negative for two consecutive quarters, the first and second, but with other indicators like employment holding firm, the NBER did not rule it a recession. It is a case where relying only on the "two-quarter rule" would have led to a wrong conclusion.

What It Means for Long-Term Investors

A recession is a natural phase of the economic cycle. Throughout the history of capitalism, recessions have recurred periodically, and each time the market has repeated declines and recoveries.

What matters is that it is virtually impossible to call "whether we are in a recession right now" in real time. Even the official determination comes out with a time lag. So a more useful question for a long-term investor is not "let's predict the recession" but "is this an asset allocation that can endure even when a recession comes?" Understanding in advance the drawdown and the loss duration of a recession phase is a more realistic form of preparation than prediction.

よくある質問

Q. So is the "two consecutive quarters of decline" criterion wrong?

It is not entirely wrong. Because most actual recessions do show GDP falling for two consecutive quarters, it is usable as a rough signal. It is just that it is not the "official definition," and because exceptions exist, relying on it as the sole criterion can lead to misjudgment.

Q. Who determines recessions in Korea?

In Korea, Statistics Korea operates a "business cycle" system that determines the peaks and troughs of the cycle after the fact. Similar to the U.S. NBER, it divides phases by synthesizing not only GDP but several indicators such as production, consumption, and employment. The arbiter and method differ slightly by country.