Recession Vs Depression

As anyone that has a computer, a TV, a radio, or even two cans tied together by strings has noticed by now that the United States economy is experiencing a recession. So what exactly is a recession? It really depends on who you ask.

A recession is defined by some as a drop in GDP for two consecutive quarters. A recession forms the part of a business cycle, which is a irregular series of phases that are: contraction, trough, expansion and peak. A contraction is a the shrinking of economic activity, usually measured by GDP. A trough is the lowest point that an economy falls to, which cannot be determined until the next phase, or expansion. Expansion occurs when the GDP increases after a decrease. Finally, the peak of the economy is the highest point that it reaches before it begins to contract again. A recession is a long contraction.

The National Bureau of Economic Research has a different definition, which is much more specific.

The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, 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.

So what is a depression? Again, economists can not agree on a definition. As every website dedicated to this topic has quoted, “A recession is when your neighbor loses his job and a depression is when you lose yours. Moving on.

Before the Great Depression, all recessions were called depressions. Only after the 10+ year recession, did economists come up with a definition to differentiate the two. One way that economists define a depression is a 10% reduction in real GDP. This definition accounts for any depression that the United States has seen. It also mean sthat the Great Depression was actually 2 depressions, as the GDP of the US fell 33% from 1929-1933. The US then experienced a slight expansion until 1937-1938 when the GDP dropped another 18%. I am sure anyone that lived in the 1930’s would want to call it one long depression.

And now…DJI in the last year… (sorry, it won’t let me paste it). The Dow Jones has lost 37% in the past year. Only time will tell if we truly will enter a “depression,” but economists so far are optimistic that we will not.

14 Responses

  1. Hey, link NBER site.

    So, how much drop in real GDP have we seen?

    Can some segments of the population experience a depression?

  2. I think that words like depression and recession are thrown around a lot without a general understanding of what they actually mean. Like you said, you can’t turn on the TV or read a newspaper without seeing something about the recession. I also think this could, in and of itself, be a cause of the continued decline in the markets. People are fear trading and because the media would much rather portray stuff in a negative light, they are not helping people to see the light at the end of the tunnel.

  3. I thought the knock against the financial media is that they never want to portray events in a negative light. I thought the reason Jon Stewart’s evisceration of Jim Cramer was because he represents the kind of cozy, pump-up-the-market mentality that people feel like contribute to the bubble economics around housing.

  4. My Dad is a hedge fund manager, and he often says that in the stock market, by the time the world realizes we’re in a recession, we’re already out of it. That said, those actively involved in the markets tend to be more aware of these recessions. Therefore, I was also always under the impression that the financial media was want to avoid portraying events in a negative light, to avoid the panic, and a worse recession.

  5. Kelli that is my sense too. Your Dad is a hedge fund manager??????

    Can he be a guest blogger for us for a week?

  6. Why is the second hump a bubble echo? Where did that chart come from?

  7. I’m still a little confused as to why some people say this is worse than what we saw during the Great Depression, and some say that we managed to avoid what happened in the Great Depression. If we avoided it…how much worse would things have to get for us to be there. And if we did reach or even surpass the Great Depression, how much worse off are we than they were? Anyone have any good ideas for names of what we can call this one in the history books?

  8. Holly’s questions along with Evan’s post really got me interested in the whole recession vs. depression. When I googled the terms the first site that came up stated the following:

    “Renowned financial publication The Economist reports that, based on the characteristics of the current financial crisis, the U.S. is in a depression, not a recession.”

    “A depression is characterized by “falling asset prices, a credit crunch and deflation,” according to the article, all factors that we see unfolding in the current crisis.”

    I feel as if no one knows what to call it, and it is just another term that is going to vary by source. I’m just going to stick with my favorite term — huh?

  9. Oh, and here’s the link to the website I was looking at:

  10. I updated to add a link to the NBER.

    I think that the media plays a very important role in the economy. Much of the stock market as well as consumer spending is a product of what people think about certain indicators. Just the other day, Obama announced his plan for the auto companies, and the stock market dipped 300 points on the announcement. I feel that if everyone in America went out and bought a lot of things and pretended the economy is doing well, it probably would be doing better than it is.

    About John Stewart Vs. Cramer

    I think that Stewart was very upset at Cramer for painting a false picture of how the stock market really works. Cramer, a former hedge manager, understands how other manipulate the market (as he is (not legally) guilty of doing so in the past). He never mentions on his show how people short selling stocks and his advice generally taken by long-term small investors. In reality, the stock market is really controlled by large institutional investors who do not look for long-term games. Cramer and CNBC portray the stock market one way, while the rest of Wall Street is playing a game. Stewart is upset with CNBC especially, as it is a news channel and should be digging deeper into the game, instead of giving surface advice that it knows is not exactly the case.

  11. About Recessions:

    It’s funny that there are so many definitions. On Monday, my econ professor quoted that a recession is 2 quarters of declining GDP. I wanted to ask her more about this but it wasn’t relevant to class.

  12. @ Evan

    That seems like a pretty cogent sum up of Stewart v Kramer to me. I still find it amusing when real journalists start analyzing whether he was fair or not. That just drives home Stewart’s point: he is a clown and jester and can not be engaged as a serious journalist without becoming part of the satire.

    @ Blaire
    I think the definition of recession is pretty clear for Economists. Depression is not technically defined and has many definitions. Dostoevsky said happy families are all alike, but unahppy ones are all unhappy in their own way (paraphrasing). Maybe it holds for economies. Gwoth is growth. When it comes to misery, we have a plethora of terms. Depression, Great Depression, Great Collapse, Lost Decade, Great Recession, Crisis, Implosion and so on. I have already heard all these and more vying to be the definition.

  13. @Evan
    I am still curious about bubble echo on the chart. That looks like a long time to echo the previous bubble. I was wondering if you added the label.

  14. I didn’t ad that label, but I just did found a link that explains an echo bubble.

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