Stock markets have been declining for weeks, and the rush has accelerated after US President Donald Trump announced US tariffs in virtually every country on April 2.
Social media commenters say a decline in stock prices could lead to a recession. Professional JP Morgan analysts estimate that there is a 60% chance of a recession, with Goldman Sachs and Morning Stars putting odds of 40-50%.
So, what is a recession? Is there a relationship between a decline in the stock market and a recession? And is a tariff-driven recession different from past recessions? Here are some answers.
What happens during a recession?
There are a few things that tend to happen in a recession, but none of them are fun.
Business investments caused by negative perceptions of business leaders about the future of the economy will decrease. The classic case was the Great Recession of 2007-2009, caused by the collapse of the mortgage market. When this happened, the builders stopped building the house. That is, we have stopped purchasing equipment and materials, from Earth’s movers to refrigerators and roofing materials. These decisions bounced back through the wider economy. As business investments are reduced, unemployment rates will rise and working hours will decrease. The recession in the early 1980s brought unemployment to nearly 11%, and the Covid-19 recession temporarily reached 15% unemployment, then fell almost as quickly as possible. For now, the unemployment rate is much lower, at 4.2%, but it could change as the economy weakens. “In a typical recession, a relatively small number of people will actually lose their jobs, but even the threat of unemployment creates anxiety,” said Stephen Fazari, an economist at Washington University in St. Louis. If you are able to hold your job, your reward may stagnate as employees are unlikely to find other jobs that they can use to take advantage of the pay rise. Consumer purchases will decrease. “Many families are cautious about spending on recessions out of fear. They could also face layoffs and other losses in revenue,” said Gary Verteles, an economist at the Brookings facility, a think tank. These factors tend to be spiral and encourage each other. For example, a decrease in business investment will cause an increase in unemployment, reduce consumer spending, and business investments that will result in an additional increase in unemployment.
How is the recession determined?
Officially, the arbitrator of the US recession is the Business Cycle Dating Committee of the National Bureau of Economic Research. The Advertising Embarrassment Committee has been marking the start and endpoint of a recession for decades. It currently includes economists from Harvard, Princeton, Northwestern, Massachusetts Institute of Technology and the University of California, Berkeley.
The committee will deliberate on a personal basis and take a holistic approach rather than a checklist. However, we are open to the factors used to determine the beginning of a recession: “a significant decline in economic activity that spreads across the economy and continues for more than a few months.”
The recent recession — something caused by the Covid-19 pandemic — was arguably the most unusual as it was short, continuing from February 2020 to April 2020, but it spread deeply and widely among most sectors of the economy.
In media coverage, the general criteria for determining whether a recession is ongoing is two quarters of a decline in gross domestic product (GDP), referring to the sum of all economic activity. However, the committee is officially weighing factors such as inflation-adjusted personal income, non-farm pay, household employment data, inflation-adjusted personal expenditure, inflation-adjusted manufacturing and trade sales, and industrial production.
In particular, this list does not include stock market declines.
Is there a relationship between a decline in the stock market and a recession?
In 1966, Nobel Prize-winning economist Paul Samuelson said “The Wall Street Index predicted nine of the last five recessions.”
He exaggerated the effect of the cartoon effect, but he had the point that a decline in the stock market would not necessarily lead to a recession, and not all recessions would cause a decline in the stock market.
However, history shows a strong correlation between stock market declines and recession, particularly in the years since Samuelson made that statement.
Since 1950, the United States has experienced 10 official recessions. Seven were accompanied by a standard & Poors 500 decline, a wide range of stock market gauges, while three were not. It was almost half a century ago during the double-dip recession of 1980 and 1982 that the recession did not result in a significant decline in the S&P.
Of the seven recessions associated with the stock market, the S&P 500’s average loss was around 31%. The decline ranged between 18% and 55%, with a 55% drop during the Great Recession.
For comparison, since the end of January 2025, the S&P has fallen by about 19%.
The biggest stock market decline occurred during Great Depression. Between August 1929 and July 1932, the S&P (which was calculated slightly differently afterwards) experienced a loss of 88%.
As Samuelson said, not all of the noticeable declines in the S&P 500 have caused a recession. The period surrounding the 1987 Black Monday crash saw a 28% decline due to a mix of factors including international stock selling, but the recession did not continue.
Recently, during a period of 40 years of intense inflation in the US, S&P lost around 25% from January 2022 to September 2022.
When a recession comes, how will this change?
It’s too early to say whether a recession is imminent. The stock market is an early indicator of potential economic troubles. This is based not on hard data but on investors’ perceptions of the economy’s future. That data must be released over the next few weeks and months, and the committee can then make that decision. (The fastest decision was about four months after the start of the recession, and the latest one arrived 21 months later.)
That said, if a recession occurs following Trump’s tariff decision, it could have a different attribute than other recessions.
The biggest difference is that the recession can cause high inflation.
During a typical recession, consumer demand will decline. This means that companies selling products or services will lower (or at least not raise) prices to invite passive customers to spend. But Trump’s full tariffs could drive the country into a recession and drive price increases at the same time.
This is not unprecedented. It also happened in the 1970s when the oil embargo caused a surge in gasoline prices. The phenomenon, called “stagflation,” is a combination of economic stagnation and inflation, “are much less comfortable” than a typical recession, says Douglas Holtz Arkhun, president of the central think tank, America’s Action Forum. (And don’t assume that prices will go better. The economy could very much forcefully drop in prices, despite tariffs that took place during the Great Repression after the Smoot Holy tariffs were enacted in 1930.
Another unusual feature of the tariff-driven recession may be the global reach at the same time, given Trump’s decision to apply at least 10% tariffs to almost every country in the world.
This could lead to a “cooperative recession around the world,” Holtz Airkin said.
According to economists, silver lining means that the worst-case scenario could be avoided, at least in theory. Unlike the complex mortgage industry issues that caused a major recession and the global pandemic that caused the 2020 recession, it is within the power of the president and is unable to quickly minimize the economic impact.
According to libertarian economist Daniel Mitchell, if there is a recession, it is “caused when the external shock is hopefully restored due to external shocks and endings.”