Whenever the economy shows any signs of slowing down the word recession is inevitably and frequently used in the media. It shows up regularly in coverage of politics, major breaking news, economic news and of course business and market news, making recession an important topic for us to properly address.  It is one of those words in English that doesn’t have a particularly nice ring to it. Neither does bogeyman.  Both are pretty ugly, but the bogeyman only brings fear to the hearts of young children because they don’t understand that there is no bogeyman.   That is not to say that recession does not exist but, understanding recession and what it means can certainly help allay some of the fear.

Like so many other terms and usage in market discussion, the tremendous amount of commentary on the subject has lead to the meaning being misinterpreted, distorted, confused, or lost.

There is a technical indicator of recession and it is not a finance or investment one. It comes to us from economics. Simply put, recession is two consecutive quarters of decline in a country’s gross domestic product (GDP). In other words, six consecutive months of negative economic growth means a country is in a recession. To review, Gross Domestic Product is the single most important leading indicator for you to be familiar with.  GDP is calculated on a quarterly basis, reporting on the aggregated monetary value of all goods and services produced by the entire economy during a three month period. Investors should be concerned with following changes in the GDP. Historically, our economy has grown at an annual rate of about 2.75%. Deviations from the norm can have significant impact. Growth of the GDP at rates higher than the norm may seem like a good thing, but it is generally referred to as an overheated economy. This is because rapid growth is usually unsustainable and is a precursor to high rates of inflation. Growth of the GDP at rates below the norm means the economy is sluggish and can lead to lower spending, decreased confidence, and increases in unemployment. 

In the field of investment, where timing is all-important, recession, according to its true technical meaning, covers a long time line. The investor can’t wait for six months of economic decline and perhaps one or two additional months gathering the data before a recession is actually declared. Hence comes the confusion.

Why isn’t recession readily identifiable? 

Unlike the economist, for the investor, there is no strict definition for recession. There are usually signs of recession-like behavior in the economy and these do not go unnoticed.  It is best to filter out this speculative media concern.

Different people consider different factors in making their assessment of recession, so we must remain cognizant of the fact that a slew of people are doing their analysis and some of them could be talking recession and taking recessionary measures when, according to your personal view, there really isn’t anything seriously wrong with the economy. Recession can become a psychological fabrication and herein lies the danger, because the actions of negative investors can indirectly impact you and your investments. It is well known that, the “man-on-the-street” who posses a very bullish sentiment when the market has been nosing upward for six straight months, can easily come up with a host of reasons why he shouldn’t invest when the market has been down for six months.