With the stock market at all time highs in the longest bull market in history, one question has been coming up more and more lately: “Are we due for a recession?” And the simple answer is “yes, yes we are”. But, the situation is far more complicated than that.
Let’s start with what a recession is. The National Bureau of Economic Research (NBER) defines 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”**. A more quantitative (and less wordy) definition is “two quarters of negative GDP growth”. GDP, or Gross Domestic Product, is the total value of goods and services produced in a country.
The business cycle is made up of four components: a period of expansion, which leads to a peak, then a period of contraction, which leads to a trough. It is these periods of contraction that are generally considered recessions. What’s important to realize is that every complete business cycle contains a recession. Another way to put this is that every peak is followed by a contraction. Every time, without exception.
Now, this may sound very simple and obvious, like how every summer is followed by fall, but it is just as true. To be fair, the big difference is timing. We know when fall is here, but not so much with recessions. The point is that recessions are as natural a part of the business…