Think a recession is 2 consecutive quarters of negative growth? Think again.

Government data shows the U.S. economy shrank the first six months of 2022. With slowing growth, a bear market and ever-tightening Federal Reserve monetary policies, recession warning signs are flashing in many areas of the economy. Current conditions have experts debating whether the U.S. is heading toward a recession or is already in one.

At the very least, the probability of entering a recession in the next year has gone up considerably since the start of the year. And while the word “recession” can give people flashbacks to the harsh economic conditions stemming from the 2008 financial crash, that was coined The Great Recession for a reason, meaning not all recessions are as painful.

So what constitutes a recession and when does a recession become a depression?

Definition

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months.

Generally, people think of a recession as two consecutive quarters of negative economic growth, calculated by the country’s gross domestic product, or GDP. However, the official call about whether the U.S. is in a recession comes from the National Bureau of Economic Research, a private, nonpartisan organization made up of economists.

The NBER is clear that a 2-quarter GDP decline is not exact. In its eyes, a recession usually lasts for several months and is seen not just through GDP, but income, employment, industrial production and wholesale and retail sales.

The U.S. economy in 2022

The U.S. economy contracted the first two quarters of 2022, raising recession fears. In the first quarter, gross domestic product was -1.6%, and while it was mostly blamed on an unusually large trade deficit, new indicators and projections show the trend of a shrinking economy is continuing.

Then, on July 28, the Bureau of Economic Analysis announced second quarter growth also shrank by 0.9%, marking the second consecutive quarter of negative economic growth.

Many believe the Federal Reserve is playing a hand in triggering a recession with its belated efforts to tamp down four-decade high inflation. In June, consumer prices rose 9.1% annually, the highest since 1981.

“You know what’s worse than high inflation and low unemployment? It’s high inflation and a recession with millions of people out of work,” Sen. Elizabeth Warren, D-Mass., said to Federal Reserve Chair Jerome Powell during a Senate hearing.

However, unemployment is still near historic lows at 3.6% and the latest jobs report outperformed expectations. In addition, retail sales are strong, showing that despite inflation, the U.S. consumer is in decent health. That said, the Fed recognizes a recession is a possibility as it rapidly hikes its benchmark interest rate to cool economic demand amid painful inflation.

“The recession risks are going up, partly because monetary policy could have pivoted a little earlier than it did,” Cleveland Fed President Loretta Mester said on Face the Nation in June. “We’re doing that now by moving interest rates up.”

Recession vs. depression

While a looming recession can feel scary, the truth is, it’s a pretty normal part of the U.S. economy, which has longer periods of expansion and then shorter periods of contraction. The longest ever expansion followed The Great Recession and ended with the pandemic, spanning more than 10 years. Since 1950, recessions have happened on average about every six years.

What’s far less frequent is a depression, which is when an extreme global recession lasts years, not months. The Great Depression is the one example that comes to mind, which technically lasted from 1929 to 1933, though the economic effects dragged on much longer.

Now, central banks are quicker to step in during economic turmoil. Expansionary monetary policies like quantitative easing helped stop The Great Recession from becoming a full blown depression, and it’s unlikely the Fed will let a Great Depression happen again.

However, they might let the economy fall into a recession, especially if it means bringing down inflation.

What financial term do you want explained in our next Word On The Street? Comment with your suggestion.