Two the Point — Defining a Recession and What Really Matters

There’s been heated debate (often politically charged) about the true definition of a recession. Now with two consecutive quarters of negative GDP growth in the United States, these debates will become front page news.

Here are the simple facts about defining recessions:

Two negative quarters of GDP growth is a “rule of thumb” popularized in the 1970s: In a 1974 New York Times article, the Commissioner of the Bureau of Labor Statistics offered some rules of thumb for defining a recession – two consecutive quarters of negative GDP growth was one that stuck.

The National Bureau of Economic Research (NBER) is the authority for dating recessions in the U.S.: The NBER, a private economic research organization, says a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”. Almost without exception, economists, policy makers, and investors refer to the NBER for the precise dating of a recession’s beginning and end.

The takeaway for investors is, it doesn’t really matter which definition you choose. The only reason it matters for investors is because earnings are impacted by slower economic growth. Recession or not, we think earnings expectations must be reduced to reflect the reality of a slowing economy. Of course, the magnitude of the slowdown will dictate the severity of any earnings decline, but markets will struggle to make new highs as long as earnings expectations are falling.
Source: FactSet; Bryn Mawr Trust