Recession Definition

A recession is a significant decline in economic activity in a given region that lasts for an extended period of time. In recent decades, experts have disagreed on whether falling gross domestic product (GDP) is enough to indicate a recession. When a recession looms, businesses and consumers often become more cautious with their spending, which can further exacerbate economic downturns.

When a country experiences negative GDP, rising unemployment, and falling levels of retail sales, manufacturing, and personal income for a long period of time, experts are typically willing to declare an economic recession. Read on to find out why recessions are considered a normal part of the economic cycle.

What is a recession?

A recession is a significant decline in economic activity across the economy that lasts more than a few months. A recession begins after the economy reaches its peak and then experiences a significant downturn over several months, with this economic activity reflected in real GDP, real income, employment, industrial production, and wholesale/retail sales.

A recession is often characterized by two consecutive quarters of negative growth in GDP, although other economic indicators are also considered.

The recession definition used to be identified by two consecutive quarters of negative GDP growth. In recent years, the National Bureau of Economic Research (NBER), which officially declares recessions in the United States, defines a recession as a significant decline in economic activity spread across the economy. NBER states that this decline must last more than a few months and be visible in real GDP, real income, employment, industrial production, and wholesale and retail sales before it will declare a recession.

Understanding Recession

The economy of most countries has been growing steadily since the Industrial Revolution. But what goes up must come down — at least for a short time. Short-term fluctuations in economic performance, known as recessions, have punctuated this long-term upward trend in most countries, and are a natural part of economic cycles. Recessions are a natural part of business cycles, which consist of alternating periods of economic expansion and contraction. After about six months to a year of economic downturn, the business cycle usually trends back up. That is the business definition of recession in a nutshell. Recessions happen as an inevitable aspect of economic cycles, highlighting the unpredictability and complexity surrounding them.

While the financial pain caused by recessions is temporary, the changes they bring can have lasting effects on a country’s entire economy. Major policy changes in response to a recession can rewrite the rules for doing business. Governments often adjust interest rates, regulations, or fiscal policies to encourage recovery — and some of those changes stick around long after the recession ends. In that way, recessions don’t just reflect economic shifts — they can help shape them.

What causes recession?

Recessions can be triggered by various factors, including:

• Excessive Debt: For example, the mortgage crisis in the mid-2000s occurred when individuals couldn’t repay their mortgage loans. In advanced economies, excessive debt levels can lead to financial crises that trigger recessions.
• Inflation: When the Federal Reserve raises interest rates, prices can rise rapidly while the value of a dollar stays steady.​
• Asset Bubbles: Human emotions can irrationally inflate the price of a particular stock or asset, like real estate or technology. When reality sets in, bubbles pop, and investors panic.​
• Deflation: When a deflationary feedback loop gets out of hand, spending stops.​
• Technological Change: Some economists are concerned that automation and AI could cause recessions by eliminating entire professions and categories of jobs.​
• Sudden Economic Shock: For example, the COVID-19 pandemic caused a sudden and significant change to the global economy and supply chain. Sudden economic shocks can trigger negative chain reactions, affecting businesses, job markets, and financial stability.
• Oil Crisis: Historical oil crises, such as those in the 1970s and 1980s, led to stagflation and global economic downturns by causing industrial slowdowns and rising unemployment.
• Financial Risks: The accumulation of financial risks during prosperous periods can lead to credit contraction and exacerbate economic downturns. The financial sector plays a critical role in the market imbalances that can trigger a recession.
• Interest Rate: Fluctuations in interest rates, particularly rising rates, can tip economies into recession by increasing borrowing costs and reducing spending.
• Financial Factors: The dynamics of credit growth and the accumulation of financial risks can significantly impact the economy and contribute to recessions.
• Economic Factors: Various economic factors, such as structural shifts and fluctuations in oil prices, play a crucial role in triggering recessions.
• Money Supply: Changes in the money supply, either through expansionary policies or contractions, can significantly impact economic activity and contribute to the onset of a recession.
• Consumer Demand: Insufficient consumer demand can lead to widespread economic downturns, contributing to increased unemployment and further declines in economic activity.

In some cases, an economic shock like a pandemic can trigger a recession that was already about to happen due to other economic trends.

Recession vs. Depression

In the last 40 years, there have been five recessions in the United States. For example, the COVID-19 recession began in early 2020, triggered by the global pandemic and resulting in a sharp decline in economic activity. There are no specific criteria to distinguish a “depression” from a “recession” according to NBER. Instead, a depression is defined as a severe economic decline that lasts for many years.

The Great Depression, which lasted from 1929 to 1939, is a prime example of a severe economic decline that had a profound and lasting impact on global economies.

Preparing for a Recession

Preparing for a recession requires a combination of short-term and long-term strategies to ensure financial stability and resilience. Some common ways to prepare for a recession include:

• Building an Emergency Fund: Having an emergency fund that covers 3-6 months of living expenses can provide a financial cushion during economic uncertainty. This fund can help cover essential costs if income is reduced or lost. In addition to an emergency fund, unemployment insurance can provide a crucial safety net for individuals who lose their jobs during a recession.
• Diversifying Investments: Diversifying investments across different asset classes can reduce risk and increase potential returns. By spreading investments, individuals can protect their portfolios from significant declines in any one market.
• Reducing Debt: Reducing debt can lower financial obligations and increase cash flow, making it easier to manage expenses during a recession. Paying down high-interest debt should be a priority to reduce financial strain.
• Increasing Savings: Increasing savings can build a financial buffer against economic uncertainty. Regularly setting aside money can help individuals and businesses weather economic downturns more effectively.
• Investing in Fewer Correlated Assets: Investing in assets that are less correlated with the stock market, such as bonds or real estate, can provide stability during a recession. These investments can help balance a portfolio and reduce overall risk.
• Developing a Long-Term Investment Strategy: A long-term investment strategy that takes into account the potential for recessions and economic downturns can help individuals and businesses stay focused on their financial goals. This strategy should include regular portfolio reviews and adjustments based on changing economic conditions.
• Monitoring Asset Prices: Keeping an eye on asset prices can help investors make informed decisions and maintain strategic planning during economic downturns.

By taking these steps, individuals and businesses can reduce their risk and increase their resilience in the face of economic uncertainty. Preparing for a recession involves proactive financial planning and a commitment to maintaining financial health, regardless of economic conditions.

Recent Developments and Economic Research on Recession Risks

As of April 2025, concerns about a potential recession in the United States have intensified due to recent policy changes. President Trump’s administration has implemented sweeping tariffs, including a 20% levy on European Union imports and a 34% tariff on Chinese goods, raising the U.S. average tariff to 23% — the highest in over a century. The Federal Reserve Bank has also been closely monitoring economic indicators and adjusting interest rates to mitigate recessionary pressures.

Economists also monitor the yield curve, as an inverted yield curve has historically preceded U.S. recessions, signaling potential economic weakness.

Economists warn that these tariffs could lead to stagflation, characterized by rising consumer prices and stagnant or negative economic growth, potentially pushing the U.S. into a recession. Rising inflation, driven by these tariffs, could further exacerbate economic challenges. Rising oil prices due to the tariffs could further exacerbate economic challenges and contribute to a potential recession. Major financial institutions have adjusted their forecasts in response:​

• Goldman Sachs increased the 12-month recession probability to 35%, citing the potential escalation of the global trade war.
• JPMorgan raised its forecast to a 60% chance of a global recession this year, attributing the increased risk to the recent tariff announcements.

The federal government has implemented various measures to stabilize the economy, including financial support and policy adjustments.

The stock market has reacted negatively to these developments. On April 3, 2025, the Dow Jones Industrial Average fell 4%, and the Nasdaq declined by 6%, erasing $3.1 trillion in market value. Investors are increasingly concerned that the aggressive tariff policies may lead to a significant economic downturn. ​

Central banks, such as the Federal Reserve, play a crucial role in managing interest rates and implementing monetary policies to mitigate recessionary pressures.

In light of these events, it is crucial for businesses and individuals to stay informed about economic indicators and policy changes, as they can have profound impacts on financial planning and decision-making.

Recession: Summary

• A recession is an extended period of declining economic performance across an entire economy.
• A recession typically results in a significant decline in economic output, affecting various sectors and overall economic performance.
• Many different stakeholders confirm and track economic performance and recession indicators, but recessions are officially declared by the National Bureau of Economic Research.
• Recessions can lead to price decreases, resulting in deflation and further exacerbating economic downturns.

How We Can Help Your Small Business

Whether you’re a new or experienced entrepreneur or investor, we can help. Our corporate and LLC formation services can help you get your company set up in all 50 states. We make it easy for you to create your business entity quickly. Our complete suite of business services, from Worry-Free Compliance Service to our ZenBusiness Money Pro app, can help your company at each stage of growth.