The Beginning is the End is the Beginning: A Look at Recessions

Key Points

  • Recessions are not back-to-back negative GDP quarters; they’re instead defined using four key coincident economic indicators.

  • Bear markets often overlap with recessions (and typically lead them), but not always.

  • It’s important to distinguish between leading and lagging economic indicators and to focus at least as much on trend as level.

Recession chatter is abundant lately. It’s increasingly the focus of Q&A sessions at investor events at which I’ve been speaking. I also received a series of questions last week about recessions from a Schwab colleague who has many younger Schwabbies on his team, most of whom have not lived as working adults through a recession. In putting together answers to his questions in one of our internal sites, I decided it was a topic to which I should devote these pages.

Perhaps heightened recession concerns are to be expected given the duration of the current cycle—which will become the longest post-WWII expansion if a recession doesn’t begin by July of this year. Or perhaps it’s because of the recent deterioration in economic data across a fairly wide spectrum of indicators. I’ve been touching on the topic quite a bit in my writings as well as on Twitter, but it’s time for a more evergreen look at recessions.


The bottom line is the U.S. economy will move into a recession at some point. It’s inevitable. They always occur at the end of a cycle and set the stage for the subsequent cycle. Recessions haven’t been outlawed, nor can (or should) they be prevented at all costs by the Federal Reserve or other policy-makers. What we don’t know is the length of runway between now and the next recession. I’ve been positing that at this stage, an earnings recession seems more likely in the near-term (i.e., starting sometime in this year’s first half) than an economic recession. But it’s never too early to refresh our memories as to what to look for to gauge the risk and timing of recessions.

What a recession is and isn’t

First, let’s get the definition straight. I’m always surprised when I hear or read the perceived definition of a recession being two consecutive quarters of negative gross domestic product (GDP). That is not, nor has ever been, the definition of a recession. The official arbiter of recessions is the National Bureau of Economic Research (NBER) and they define a recession as “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.” Not coincidentally (pun intended), those latter four economic readings make up The Conference Board’s Index of Coincident Indicators, which get released monthly alongside the Leading Economic Index (LEI), which I’ll get to later in this report.