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.