First things first: We talk a lot about markets since we want you to know what’s going on with your investments. But the stock market is not the economy. Just look at the Financial Crisis in 2008: The stock market recovered long before the rest of the economy.

So, what triggers a recession, versus a bear market, and what is “the economy,” really? That’s what we’re looking at in this article.

What is the economy?

When politicians and media pundits refer to the “economy,” there’s a number of metrics they might be referring to: jobs, wages, the strength of the dollar, and more. For economists, though, the biggest single measure of a country’s economic health is gross domestic product (GDP).

In other words, our economic health is measured by the total value of goods and services we produce, as tracked by the Commerce Department. These numbers get released every quarter (and are revised a few times as more information becomes available).

As you might guess, the number of goods we produce often depends on global factors (the global economy) and may be influenced by internal factors, too. We’ll talk about how these factors come together a bit later in this article. But first, let’s stick with GDP to talk about recessions.

Growth and recession

Technically, a recession occurs when GDP shrinks for a significant period. Historically, two consecutive quarters of GDP decline signal a recession. However, this number is somewhat arbitrary, the same way a 20% decline signals a technical bear market. Unlike bear markets, though, the National Bureau of Economic Research (NBER) tend to use a more blurry definition when deciding whether to declare a recession.

A recession is 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.

That means NBER is looking at numbers beyond just GDP. When it comes to a depression (versus a recession), there is no specific criteria that indicates depression territory, but experts tend to look for economic decline of more than 10 percent or unemployment above 20 percent. (Both occurred during the Great Depression).

While this metrics can sound bleak, and while recessions have real impacts on American families, there are a few things to keep in mind. First, recessions are a normal part of the economic, or business cycle, whereby the economy grows and shrinks in a cycle. Second, despite these cycles, the trend in the U.S. economy is toward growth. Since the industrial revolution, the country’s economy has expanded continually, and there’s no reason to believe that will stop, despite periodic recessions.

Economic indicators

While GDP is the main metric for measuring the economy, experts (including the Federal Reserve) look at other economic indicators as well.

One of the most important? The unemployment rate. The Department of Labor tracks and reports the number of people who want to work but can’t find jobs. There are supplementary numbers as part of this report that you might hear about, including how different sectors of the economy are faring or the number of people who’ve stopped looking for jobs.

Employment numbers are an important measure of economic health because when people aren’t working, they have less money to spend on goods and services (which impacts those businesses, and potentially their share price if their public companies). It can also impact those individuals’ ability to save, pay rent, invest and more… all of which have potential ripple effects.

Other indicators include consumer sentiment, which shows how people are feeling about the economy and is tracked by the University of Michigan. The Federal Reserve tracks savings rates and the amount of debt Americans carry. There are also numbers that show the strength of manufacturing or retail — indexes that are specific to certain areas of the economy. These indicators have a similar potential for ripple effects.

Some experts also look at the stock market, as corporate America can be an indicator as well. Public corporations not only produce goods and services, they also hire smaller businesses as contractors or vendors and provide employment to large swaths of people. This is one reason stock  and the economy are often referred to interchangeably.

The catch—which tends to fuel “the stock market is not the economy” refrain—is that stock prices can be influenced by more factors than just the underlying health of the company—interest rates, new products on Wall Street, and other behind the scenes factors sometimes affect share prices beyond supply and demand.

The global economy

There is, technically, a world economy that refers to the economy at a global scale. It’s measured generally speaking, by the international exchange of goods and services, as valued by different currencies. If that sounds complicated, it is.

As globalization continues, and as trade increases, the economies of independent countries become more intertwined. A recession or economic hiccup in one part of the world has the potential to impact other economies.

A global recession occurs when multiple economies across the world experience the same type of slowdown. Because countries trade heavily with each other nowadays, this is more likely than not.

Global economy at play: Ukraine

Ukraine is a relevant example of how economies across the globe are connected. When Russia invaded Ukraine in early 2022, markets across the globe reacted. While many countries, including the United States, moved to rally behind Ukraine, economists warned that Russia is a major producer of both natural gas and wheat—and war or sanctions could jeopardize supply of these goods to European markets.

Any shortages of these goods supplied to Europe could create an increase in prices (due to supply constraints) which had the potential to increase prices in the U.S., where high inflation was already a consideration.

We saw similar effects of supply disruptions in U.S. prices and the U.S. economy during COVID-19, when the global supply chain was interrupted at varying degrees and at varying times depending on the spread of the virus and countries’ response.

Or for a more constant example, we see this kind of ripple effect any time there is a conflict in the Middle East with the potential to impact oil production.

Making economic predictions

Remember, the field of economics has never been an exact science. Even economists sometimes use flexible metrics, such as the criteria for declaring a recession.

If the economy you experience feels different than the economy pundits and reporters are discussing on the news, it’s likely due to these discrepancies. It’s also important to remember that while the stock market is not the economy, they are related.

Because of this, we monitor both economic trends and the market, and distill them for you each month. We also work with experts who help us analyze data objectively, so we can take some of the subjectivity out of investment decisions. This approach means you don’t have to monitor the day-to-day headlines about the market and can focus on decisions that are best for you and your family.