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How Do We Know If We're in a Recession? Thumbnail

How Do We Know If We're in a Recession?

The "informal" definition of a recession is two consecutive quarters of negative Gross Domestic Product (GDP) growth. Based on that one metric, the U.S. slipped into a recession in the summer of 2022.

So why is there still so much debate on this topic?

Because the health of our economy is bigger and more complicated than any one number, whether it's the GDP, the Dow Jones Industrial Average, or the inflation rate. In fact, the "official" designation of a recession depends on this broader picture and a longer timeline than you're likely to see on social media or cable news.

An "Official" Recession

The National Bureau of Economic Research is a private, nonprofit organization that provides nonpartisan, unbiased economic data. When most economists and financial professionals are discussing a particular recession, they almost always use the NBER Business Cycle Dating Committee’s start and end dates, as determined by ...

Well, we don't really know!

The NBER doesn't publish any fixed rules or specific thresholds to decide whether or not we're in a recession. Two consecutive quarters of negative GDP growth might send talking heads into a frenzy, but that metric doesn't automatically set off flashing lights as far as the NBER is concerned.

Instead, the NBER defines a recession as "a significant decline in economic activity that is spread across the economy and lasts more than a few months." They also don't declare a period of time as a recession until well after the fact, sometimes even a year later. No wonder the "informal" recession definition gets so much more airtime in our instant-reaction, hot-take media cycle.

Looking Beyond GDP

The wisdom in the NBER's approach to defining a recession is that they weigh all the data, positive and negative, as well as the effects that some key metrics have on the total economy over time.

For example: if the NBER used the traditional recession definition and only looked at 2022's GDP numbers, they'd be overlooking 50-year lows in unemployment and steady job growth, including 263,000 new jobs in September. Many observers suspect that unemployment and jobs numbers factor into the NBER's analysis, and these positive trends just aren't consistent with what we've seen in past "official" recessions.

The NBER probably doesn't include the markets in its analysis. But as you can see from this chart, declining market returns are often an indicator that a recession is coming.

This chart also reminds us that while the S&P 500 has lost around a third of its value during recessions, it's also recovered those losses and continued to grow.

I've heard a lot of folks arguing that "this time is different." We're still dealing with global fallout from a pandemic. There's war in Europe. Inflation is about 8% higher than it was a year ago. We're headed for a contentious election that could divide our country even further.

While past performance is no guarantee of future returns, my counter is: take another look at that chart and think about some of the events covered on that timeline. The Great Depression. World War II. Stagflation. 9/11. The Great Recession.

All of those events felt uniquely scary at the time too. And yet, when you step outside of the moment and take in the long view, the market has historically absorbed the bad news, corrected, recovered, and started growing again.

Volatility is Part of Your Plan

Economist Paul Samuelson famously joked, "The stock market has predicted nine of the past five recessions." Meaning, people tend to overreact to market volatility and take an overly pessimistic view of what's coming.

Right now, I think Samuelson's quip applies to the wider economy as well. Whether we're technically in a recession or not, the world feels very unsettled, and lots of folks are hurting. Understandably, that can trigger some very emotional reactions around our money, especially for seniors who are trying decide if they can retire in the near future.

But it's important to remember that comprehensive financial plans, like the ones we build at Keen Wealth, anticipate that the markets won't grow in a straight line. We pride ourselves on helping folks develop the perspective and the discipline they need to stick by their plans during downturns -- and even recessions -- so that they can stay on track to achieve their long-term retirement goals.

About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

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