Recession

Significant decline in economic activity, often two consecutive quarters of negative GDP growth.

A recession is a significant, widespread, and prolonged downturn in economic activity. While a common rule of thumb defines a recession as two consecutive quarters of declining gross domestic product (GDP), official designations are typically made by economic bureaus (such as the National Bureau of Economic Research in the US) that analyze a broader range of monthly data, including employment, real income, industrial production, and retail sales. During a recession, consumer spending drops, businesses cut back on production, and unemployment rates typically rise. Central banks often respond by lowering interest rates or implementing expansionary monetary policy to stimulate borrowing and investment, while governments may increase spending or cut taxes through fiscal policy. For retail investors, recessions are critical because they generally lead to lower corporate earnings, which can trigger stock market declines or bear markets. Defensive sectors like consumer staples and utilities tend to hold up better, while cyclical sectors like industrials and luxury goods often suffer. A common pitfall for investors is panicking and selling assets at the bottom of a recession, missing the subsequent recovery which historically begins before the recession is officially declared over.

During a hypothetical economic cycle, Country A reports GDP growth of -0.5% in the first quarter and -1.2% in the second quarter. Because the country has experienced two consecutive quarters of negative GDP growth, it meets the technical definition of a recession, prompting investors to shift capital from cyclical stocks to defensive assets.