What Is Recession?
A recession is a significant decline in economic activity lasting more than a few months. Learn what causes recessions, how they affect investments, and how to prepare.
Definition
A recession is a significant, broad-based decline in economic activity that lasts more than a few months. The National Bureau of Economic Research (NBER), which officially declares U.S. recessions, considers factors like GDP, employment, industrial production, and retail sales. The common shorthand of "two consecutive quarters of declining GDP" is popular but not the official definition.
Recessions are a normal part of the economic cycle. Since World War II, the U.S. has experienced about 12 recessions, averaging roughly one every 6-7 years. They vary dramatically in severity: the 2020 COVID recession lasted just two months (the shortest on record), while the Great Recession of 2007-2009 lasted 18 months and eliminated 8.7 million jobs.
During recessions, unemployment rises, consumer spending drops, corporate profits decline, and the stock market often (but not always) falls. However, recessions also plant the seeds of recovery by clearing out excess and creating opportunities for stronger businesses and new investments.
Real-World Example
During the Great Recession of 2008-2009, U.S. GDP contracted by 4.3%, unemployment peaked at 10%, and the S&P 500 fell 57% from peak to trough. Housing prices collapsed, major banks needed bailouts, and consumer confidence hit record lows. Yet investors who bought stocks near the bottom in March 2009 saw their investments multiply several times over the following decade as the economy recovered.
Why It Matters
Recessions are frightening but temporary. Every recession in U.S. history has been followed by a recovery. The average recession lasts about 10 months, while the average expansion lasts about 5 years. Understanding this asymmetry helps investors resist the urge to sell everything during downturns. Recessions are also when disciplined investors -- those with emergency funds, diversified portfolios, and long time horizons -- gain the biggest advantage over those who panic.
Get Glen’s Updates
Investing insights, new tools, and whatever I’m building this week. Free. No spam.
Unsubscribe anytime. I respect your inbox more than Congress respects property rights.
Frequently Asked Questions
What is the difference between a recession and a depression?
A depression is a severe, prolonged recession. There is no official definition, but a depression generally involves GDP declining more than 10% or a recession lasting more than 2 years. The U.S. has only experienced one true depression: the Great Depression of the 1930s.
How long do recessions last?
Since World War II, U.S. recessions have averaged about 10 months. The shortest was 2 months (2020) and the longest was 18 months (2007-2009). Recessions are much shorter than expansions on average.
Should I sell my stocks during a recession?
Generally no. Selling during a recession often means selling at or near the bottom. The stock market typically begins recovering before the recession is officially declared over. Time in the market beats timing the market.
What jobs are recession-proof?
Healthcare, education, government, utilities, and essential services tend to be more resilient during recessions. No job is completely recession-proof, but these sectors have historically had lower unemployment rates during downturns.
Related Terms
Recommended Resources
Tools & books I actually use and recommend
SeekingAlpha Premium
Quant ratings, earnings transcripts, and the stock analysis community where I published 300+ articles.
Try SeekingAlphaA Random Walk Down Wall Street
Burton Malkiel's classic case for index investing. The book that convinced millions to stop stock-picking.
View on AmazonThe Little Book of Common Sense Investing
John Bogle's manifesto on why low-cost index funds beat everything else. Straight from the founder of Vanguard.
View on AmazonSome links above are affiliate links. I only recommend products I personally use. See my full disclosures.
Keep Exploring
Recession-Proof Jobs
Careers that weather economic downturns.
Read moreHistoryFinancial Crises History
Major economic crises and how markets recovered.
Read moreCalculatorEmergency Fund Calculator
Calculate how much you need to survive a recession.
Read moreHubFinancial Glossary
Browse all 106 financial terms.
Read more