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Yahoo U: What is a recession?

Yahoo Finance’s Brian Cheung joins the Yahoo Finance Live panel to discuss what a recession means on today's Yahoo U.

Video Transcript

ZACK GUZMAN: I want to shift gears over to another thing. We just learned a lot right there. But let's learn some more. In this week's Yahoo U, Yahoo Finance's Brian Cheung is breaking down what a recession actually is. We hear a lot of people talking about that, especially as we watch and see potentially a double dip recession in the eurozone. So who gets to define what a recession is and how do we figure out when we're actually in one? Take a listen.

BEN CHEUNG: Class is in session. And we're diving into recessions. We all know loosely what it is. It's an economy that's in bad shape. But what is the definition of recession? When do we know we're in one? And who gets to make that call anyway? A lot of people look at GDP-- a measure of economic activity.

And GDP broadly measures am economy's production of goods and services. It involves counting all that an economy consumes and invests, in addition to what the government spends. It also accounts for trade with other nations, by taking the difference between what an economy exports and what it imports. A lot of people have this street definition of a recession-- two consecutive quarters of a decline in real GDP. But the National Bureau of Economic Research, the body that actually makes these calls, looks at a broad dashboard of different economic indicators.

So sure, GDP is one of them, but the NBER also looks at employment and income among other things. Take a look, for example, at the 2008 financial crisis. The NBER declared December 2007 as the beginning of the recession. But change in real GDP, quarter over quarter on an annualized basis, was -2.3% in the first quarter of 2008. But the second quarter of 2008 was +2.1%.

Here's another example. The dot com bubble in the early 2000s. There also were in two consecutive quarters of GDP contraction here. It was negative in Q1 2001, then +2.4% in Q2, and then -1.7% 1.7% in Q3. The NBER actually declared this period a recession not based on GDP, but based on another measure called gross domestic income, which did contract for three consecutive quarters in 2001. Now what's really interesting and weird about the NBER's methodology is that it requires looking back on data, which means they can't call that a recession started until after the economy has already entered one. Sometimes, with a huge lag.

For example, the NBER declared December 2007 the peak of the Great Recession. But they didn't declare it until 11 months after the fact. Same with March 2001. They didn't declare it until November that year. The COVID-19 crisis was a bit clearer given the quick and vicious economic impact as lockdowns began en masse in early spring 2020. But it still took the NBER four months to declare that it had begun, back in February.

Now of course, when it comes to people losing their jobs or losing income, no one needs an NBER declaration to figure out when the economy looks bad. But it's a major part of how we record the history of our economy. So the next time you're wondering if we're in a recession, don't cling on to that two quarter myth. Remember that it's deeper than that. And that is this week's Yahoo U. Class is dismissed.

ZACK GUZMAN: Brian Cheung--