Even before the trade war narrative ignited by President Trump’s “Liberation Day” tariffs, I had contended that recession risks were rising. I fear now that the U.S. economy is in, or about to be in, a recession. But what is a recession, really, and how would it impact you?
What is a recession?
A popular quip among economists is: “A recession is when your neighbor loses their job. A depression is when you lose yours.” For many people, a recession is more of a “vibe” than the strict adherence to a definition.
Despite how often we hear the term, there is no agreed-upon definition of a recession. Old-school economists like me typically define a recession as two consecutive quarters of declining economic output, as measured by gross domestic product (GDP). By that definition, we are nearly in a recession right now. GDP for the first quarter of 2025 will probably be sub one percent, or even near zero. The current quarter will probably be negative.
This “two consecutive quarters of GDP decline” measurement is simple and widely used. If the U.S. economy’s inflation-adjusted GDP drops for half a year, many commentators will declare a recession is underway.
However, the National Bureau of Economic Research (NBER)—the private nonprofit that serves as the unofficial-official arbiter of U.S. business cycles—takes a broader view. The NBER defines a recession as “a period of falling economic activity, lasting more than a few months, widespread across the economy” and visible in multiple indicators. In other words, it is not just GDP that matters.
The NBER looks at real income, employment, industrial production, and wholesale and retail sales when deciding if a downturn is severe enough to call a recession. Sometimes, GDP might briefly dip and recover (or get revised later), so the NBER waits to see several data points decline before it declares an official recession. For example, in early 2001, the U.S. experienced a mild recession even though GDP did not decline two quarters in a row—employment and other measures still fell, so NBER later designated it a recession. The key takeaway: A recession means broad economic decline—factories produce less, workers earn less, people buy less, and businesses’ sales fall—over an extended period, not just a one-month blip. An exception to the “blip” rule was the COVID-19 recession—it was brief but so deep that the NBER declared it a recession.
A brief history of U.S. recessions (and a lesson on trade wars)
America has experienced many recessions—some small, some catastrophic. The Great Depression of the 1930s remains the worst-case scenario against which all recessions are measured. Between 1929 and 1933, U.S. GDP collapsed by roughly 27 percent, and unemployment soared to nearly 25 percent. In contrast, a mild recession might experience a one percent to two percent contraction; the Great Recession in 2007–2009 saw a contraction of 4.2 percent. GDP dropped 10.1 percent during the COVID-19 recession.
The Great Depression was an economic nightmare marked by bank failures and breadlines. One oft-cited factor that exacerbated the Great Depression was the Smoot-Hawley Tariff Act of 1930—a protectionist trade law that sharply raised U.S. import taxes. The intent was to protect American jobs, but it backfired.
Fortunately, most downturns are not as severe as the 1930s. In the post-World War II era (1945 onward), the U.S. economy has had 14 official recessions. On average, a recession has occurred roughly every six to seven years. Some were brief and mild (for example, the recession of 1990–1991 was relatively short and saw GDP dip only about 1.4 percent, while others were protracted and painful (the Great Recession of 2007–2009 saw GDP fall 4.3 percent from peak to trough). Historically, recessions have become less frequent and shorter on average in recent decades, thanks in part to better economic policy and safeguards (for instance, bank deposit insurance and unemployment benefits help soften the blow). Before 2020, no postwar recession even came close to the depth of the Great Depression—the highest unemployment rate since the 1930s was 10.8 percent in 1982.
Economic expansions (good times) tend to last much longer now than expansions did pre-1940, and recessions are generally milder. But recessions do still happen. A booming economy can turn sour due to various triggers—oil price shocks, bursting financial bubbles, global crises, or, yes, trade conflicts. The recent “Liberation Day” tariffs announced by President Trump in 2025 are one example of a potential trigger. This policy shift ignited a global trade war and even spooked stock markets into a sharp dive. Such shocks can erode business and consumer confidence, leading companies to pull back on hiring and investments. If the dominoes fall, a trade dispute or financial panic can tip an otherwise growing economy into a contraction. History has taught us that policy missteps (like aggressive tariffs in a fragile global economy) can worsen a downturn.
How recessions impact jobs, income, and businesses
Recessions have real, human consequences for millions of Americans. The most immediate impact is usually felt in the job market. When demand for goods and services falls, businesses see lower revenue and often respond by cutting costs. Unfortunately, that can mean hiring freezes or layoffs. Unemployment rises in a recession as companies reduce their workforce. In a typical post-war recession, the jobless rate might increase a few percentage points, translating to millions of people losing work.
In harsher recessions, the spike is even more significant. During the 2007–2009 Great Recession, U.S. unemployment jumped from about 4.7 percent in 2007 to 10 percent by late 2009. Roughly 8.7 million jobs were eliminated during that downturn. In the brief but extremely sharp 2020 COVID-19 recession, the unemployment rate went from 3.5 percent to an astounding 14.7 percent in a matter of weeks. Over 24 million Americans lost their jobs in just the first three weeks of April 2020 as the pandemic lockdowns took hold. Although many of those layoffs were temporary, it was a record-breaking collapse in employment—the largest ever recorded in such a short span.
Losing a job (or even fear of losing one) has a ripple effect on family finances. Household incomes drop when people are laid off or have their hours cut back. Even those still employed might see smaller pay raises or cuts to bonuses and overtime. During the Great Recession, for instance, median U.S. family income fell about eight percent as jobs grew scarce and wages stalled. When people have less money coming in, they naturally tighten their belts on spending—fewer dinners out, postponed vacations, and delaying big purchases like cars or appliances. This pullback in consumer spending then feeds back into business revenues, potentially causing more layoffs and creating a vicious cycle. Preventing such a downward spiral of falling demand is a significant challenge for policymakers in a recession.
Small businesses are often hit especially hard. These local shops and family-run companies typically operate on thin cash buffers, and a sudden sales slump can be devastating. Many small firms do not survive a prolonged downturn. In the Great Recession, for example, an estimated 730,000 small business owners permanently closed up shop (about a five percent drop in the number of U.S. business owners).
Another painful aspect of recessions is the credit crunch. Banks and lenders, worried about borrowers defaulting, tend to tighten lending standards when the economy sours. It becomes harder for businesses to get loans to expand or even cover short-term cash needs. Banks might cap loan sizes, raise interest rates, or require stronger credit scores for approval. This credit tightening often starts even before a recession is officially underway, as banks react to storm clouds on the horizon. In early 2023, for instance, banks were already reporting a degree of tightening in loan standards comparable to the 2008 financial crisis and the 2020 pandemic shock. During recessions, reduced access to credit can choke off growth for businesses that might otherwise weather the storm, leading to more bankruptcies and closures. Getting approved for a mortgage, auto loan, or even a new credit card may become tougher for households. In short, borrowing gets harder when money is tight, adding another headwind for families and entrepreneurs.
All these factors—job losses, income declines, business failures, and tighter credit—combine to make recessions very challenging for the average family. People often dip into savings or scramble to find new work, sometimes switching industries or taking gig jobs to make ends meet. Those who lived through the Great Recession recall how it took years for their finances to recover. Indeed, U.S. employment did not fully return to its pre-2008 level until 2014, and some effects, like reduced wealth or delayed retirements, lingered much longer. This is why the mere talk of a recession can be anxiety inducing: Families know it means bracing for possible tough times ahead.
Recessions and the stock market: A punishing decline with an early bottom
Beyond jobs and GDP, recessions also wreak havoc on investments and retirement savings. When economic clouds gather, the stock market is often one of the first places to reflect the fear. Stock prices usually fall sharply heading into and during a recession. Investors anticipate that corporate profits will decline—companies tend to earn less if consumers are spending less and businesses are struggling. So, stock values adjust downward, sometimes violently. A bear market (a decline of 20 percent or more in stock indexes) has accompanied many recessions. For example, the S&P 500 stock index plunged by about 57 percent from its 2007 peak to the trough in early 2009 during the Great Recession, and it dropped roughly 34 percent in the space of a few weeks during the 2020 COVID-19 recession. In more routine recessions, stock declines have been milder but still significant, often on the order of 25 to 35 percent. Market downturns directly hit investors’ 401(k)s, IRAs, and other investment accounts, which can be gut-wrenching for those watching their nest eggs shrink.
However, there is a silver lining: The stock market tends to be a forward-looking indicator, often rebounding before the broader economy does. History shows that stocks typically bottom out and begin to recover while the recession is ongoing, anticipating eventual economic improvement. In fact, on average, the U.S. stock market has found its low point about five months before the recession officially ends.
The average duration of a recession is 10 months, excluding the Great Depression and the Financial Crisis of 2007–2009. Let’s assume that the U.S. is currently in a recession that started in February 2025 and will last until December 2025. If history were to repeat, the stock market would bottom in July 2025.
Why does this happen? Investors tend to make bets on future earnings and economic conditions. So, if they expect things to improve in six months, they start buying stocks now, lifting the market even while the current news is grim. The stock market “climbs a wall of worry” during a recession: Even as bad news peaks, savvy investors begin hunting for bargains in beaten-down stocks, anticipating better days ahead. Of course, not every company’s stock will recover as quickly—and some may never recover if the recession permanently damages their business. But broadly speaking, the stock market has always recovered after every U.S. recession, often well before the recovery is felt on Main Street. If you look at long-term averages, stocks deliver positive returns in the years following a recession, which is why many financial advisors counsel staying invested through the storm rather than pulling out at the bottom.
It is worth noting that corporate earnings usually drop during recessions (companies report lower profits), and those earnings typically hit a low around the same time the economy does, which might be just as stocks are starting to rise. This disconnect can be puzzling: You might see headlines about companies reporting terrible quarterly results, yet the stock market is rallying. That is because investors are focused on what earnings will be in a year or two, not what they are in the middle of the recession. In short, the stock market’s timeline is not in sync with the real economy. As an investor or retiree, your portfolio might begin to heal even while the economy is still sick. Understanding this dynamic can help families avoid the mistake of selling in panic at the bottom, only to miss the subsequent recovery.
For investors, history offers comfort: Patience and discipline through the market’s roller coaster tend to be rewarded when the economy finds its footing again.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
