The difference between the two terms is not very well understood for one simple reason: There is not a universally agreed upon definition. If you ask 100 different economists to define the terms recession and depression, you would get at least 100 different answers. I will try to summarize both terms and explain the differences between them in a way that almost all economists could agree with.
Recession: The Newspaper Definition
The standard newspaper definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.
This definition is unpopular with most economists for two main reasons. First, this definition does not take into consideration changes in other variables. For example this definition ignores any changes in the unemployment rate or consumer confidence. Second, by using quarterly data this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected.
Recession: The BCDC Definition
The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) provides a better way to find out if there is a recession is taking place. This committee determines the amount of business activity in the economy by looking at things like employment, industrial production, real income and wholesale-retail sales. They define a recession as the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out. When the business activity starts to rise again it is called an expansionary period. By this definition, the average recession lasts about a year.
Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. This leads to the simple definition of a depression as a recession that lasts longer and has a larger decline in business activity.
So how can we tell the difference between a recession and a depression? A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.
By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent. If we use this method then the Great Depression of the 1930s can be seen as two separate events: an incredibly severe depression lasting from August 1929 to March 1933 where real GDP declined by almost 33 percent, a period of recovery, then another less severe depression of 1937-38. The United States hasn’t had anything even close to a depression in the post-war period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent. Countries such as Finland and Indonesia have suffered depressions in recent memory using this definition.
Now you should be able to determine the difference between a recession and a depression without resorting to the poor humor of the dismal scientists.
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The U.S. economy might finally bounce back for good in 2014, springboarding the nation out of five years of stagnation. So if you feel like we’re still in a recession, are you imagining things?
Not at all. In fact, some economists think we’re in a kind of faux recovery that masks deep harm still being done to the economic prospects of millions of Americans. Brad DeLong, an economist at the University of California, Berkeley, and a government policymaker during the Clinton administration, wrote recently that, “unless something returns the U.S. to its pre-2008 growth trajectory, future economic historians will not regard the Great Depression as the worst business-cycle disaster of the industrial age. It is we who are living in their worst case.”
Worse than the Depression? By most measures, the economy has been weak since 2008, but not nearly as ruinous as in the 1930s. But DeLong has crunched some numbers in a way that helps explain why many people still feel they’re falling behind, even with an economy that has supposedly been growing every year since 2010.
GDP began to decline in 2008, and it wasn’t until 2010 that it reclaimed the 2008 peak. Adjusted for inflation, GDP peaked in 2007 and didn’t reach that level again until 2011. DeLong goes one step further, adjusting GDP for both inflation and population growth, to capture the state of the economy most people actually feel. By that measure, real (inflation-adjusted) GDP growth per capita won’t reach the 2007 peak until sometime in 2014.
A lower output
The growth in real economic output per person has averaged about 2% per year for the past century. So if growth has been essentially zero for the past seven years, says DeLong, output is 14% lower than it would have been had the economy been growing at normal rates.
Such statements tend to leave ordinary people wondering, “So what?” But DeLong has addressed the so-what question. That output gap, he says, amounts to about $9,000 per person each year in terms of money not spent on goods and services that could have made people’s lives better. That’s roughly equal to a year’s worth of mortgage payments on a $200,000 home. For a family of four, the lost output adds up to about $36,000 per year — the equivalent of a fully loaded Ford Fusion sedan. And the per capita output gap is likely to get even bigger if growth continues on the current trendline.
That doesn’t mean everybody would have automatically become wealthier if not for the 2008 financial meltdown and corresponding recession. Median incomes had been stagnant for nearly a decade by the time the recession hit, on account of factors such as globalization and the digital revolution. The divide between haves and have-nots had been widening, too, with highly skilled technocrats generally prospering and lower-skilled workers in fading industries falling behind, perhaps never to catch up.
Even if that $9,000 in per capita output hadn’t disappeared, it wouldn’t have been divided evenly among all Americans. The wealthy probably would have captured more of it, the poor less. And it’s always tricky accounting for what didn’t happen, since it’s impossible to know what else might have occurred to make things better or worse.
But DeLong’s calculations help explain the sense of backsliding many Americans seem to feel. In 2007, during the prior peak for real GDP, the Conference Board’s consumer-confidence index was around 91. Today, with the total level of real GDP higher, it’s at 78. Back then, 27% of poll respondents told Gallup they were satisfied with the way things are going in the United States; in the latest poll, only 20% felt this way.
Still, it could be worse. A recent study by two prominent Harvard economists, Ken Rogoff and Carmen Reinhart, found financial crises such as the one that erupted in 2008 usually produce worse downturns than what we’ve experienced. Rogoff and Reinhart are controversial because of some mathematical errors in a previous study of debt-ridden nations, but they are still considered premier chroniclers of finanicial panics. And on average, they find, such panics cut per-capita real GDP by 9%, requiring 6.7 years for the economy to recover. The latest crisis, by their account, caused only a 5% decline in GDP, followed by a six-year recovery.
So take heart: Had the 2008 crisis been a more like a “normal” one, your family might have lost a Mercedes rather than a Ford.
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