What is a recession? How will we know when the US is in one?

( NewsNation ) — Concerns over the U.S. economy caused the stock market to falter Monday morning after a Friday jobs report came in weaker than expected.

According to the Associated Press, the S&P 500 sank 4.1% in early trading; the Dow Jones Industrial Average pulled back more than 1,100 points and the Nasdaq composite slid 5.7%.

Overseas, Japan’s Nikkei 225 went down by 12.4% — marking its worst day since 1987.

While some fear a recession, especially after the triggering of a reliable indicator known as the Sahm rule, experts caution not to panic yet.

What is a recession?

The National Bureau of Economic Research (NBER) defines a recession as “the period between a peak of economic activity and its subsequent trough, or lowest point.” In between that peak and low point, the economy is considered to be in an “expansion,” or a normal state.

Calling it the “official recession scorekeeper,” The White House said there are several variables the National Bureau of Economic Research Business Cycle Dating Committee tracks. These include real personal income minus government transfers; employment; various forms of real consumer spending; and industrial production.

“Official determinations of recessions and economists’ assessment of economic activity are based on a holistic look at the data — including the labor market, consumer and business spending, industrial production, and incomes,” the White House said, noting that there are no “fixed rules or thresholds” that determine a decline.

While the NBER says most recessions are short, the time it takes for the economy to bounce back to its peak may be “quite extended.”

How do we know if US is in a recession?

The NREB relies on government statistics reported after the fact, so it cannot officially designate a recession until after it starts.

Three measures to determine whether there’s a recession used by the NBER are depth, diffusion, and duration . Depth analyzes how much key economic indicators deteriorate; diffusion is how broadly these weaknesses are spread across industries or economic actors; and duration is how long the “extreme weakness” lasts.

The clearest signal of a recession would be a steady rise in job losses and a surge in unemployment, the Associated Press writes. Unemployment can be used to gauge whether layoffs are worsening.

A commonly used rule, named after former Fed economist Claudia Sahm, states that the economy is usually in a recession when the three-month moving average of the unemployment rate rises half a percentage point or more above its low point over the past year.
Although the Sahm rule has been in effect for every recession since 1970, economists, including Sahm herself , say this time could be different.

Sahm Rule triggered, experts say keep calm

Over the past three months,the average unemployment rate has been 0.53 percentage points above the three-month average low of 3.6% over the past year, which has people mentioning the Sahm rule.

However, Sahm has said that it is very unlikely that the United States is in a recession right now.

“This (rule) is not a forecast,” Sahm told Bloomberg , though added that unemployment is going in the wrong direction.

That unemployment statistic is “what can get us in trouble,” Sahm said.

Still, “calm is important” in a moment like this, no matter what indicator is being used to assess the economy, Sahm said in the Bloomberg interview.

“We do come into this in a position of strength, broadly speaking in the economy,” Sahm said. “That’s really important for weathering a storm like this that has many different contributors to it today.”

Federal Reserve Chair Jerome Powell said officials are aware of the Sahm rule at a news conference Wednesday , calling it a “statistical regularity.”

“It’s not like an economic rule where it’s telling you something must happen. So, again, what do we see? What are our eyes telling us? We look at all the things we’re seeing, and what it looks like is a normalizing labor market,” Powell told reporters. “Again, job creation at a pretty decent level, wages moving up at a strong level, but coming down gradually. Job vacancies have come down, but they’re still high by historical standards.”

The Fed is still watching to see if this “normalizing labor market” turns out to be more than that, Powell said. If it does, he said at the press conference, they are well-positioned” to respond.

NewsNation digital reporter Andrew Dorn and The Associated Press contributed to this report.

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