What is a Recession?

A recession is the guarded word of last resort for politicians, business leaders and bankers.  Economically, a recession is defined as the decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.  Prior to the Great Depression of 1930, there was no term to describe this short-term economic cycle.  The relatively mild economic downturns between 1910 and 1913 were called depressions but would now qualify as modern day recessions.

Because the economic definition does not address several key economic factors, the National Bureau of Economic Research (NBER) has expanded recessionary qualifications to include employment conditions, industrial production, real income, wholesale and retail sales and pricing trends.  

Typically a recession commences when economic results have peaked and business activity begins a downward shift.  The recession lasts until the business activity level reaches its trough and expansion begins.  

Prior to the current economic conditions, the worst recession existed from November 1973 until March 1975 when the GDP fell 4.9%.  Economists now track several key components to predict a recession.

• Stock Market Activity – Since 1946, when the stock market has fallen 10% or more, a recession has resulted.
• Unemployment Rate – Three consecutive months with increasing unemployment signals a recession.
• Index of Leading Indicators – A composition of 10 economic indicators that is used to predict upcoming recessions.  Since 1959, this scale has correctly predicted 7 recessions and improperly warned of 5 recessions. 

Applying the basic economic definition of a recession to the U.S. economy would indicate that since 1980 there have been 4 recessions.  The current, or fifth post 1980 recession, is the most severe. 

When a Recession becomes a Depression

Exactly How Bad is it? 

Between 1929 and 1933, the GDP fell by 30% as national unemployment capped at 25% in 1933.  Although there was no clear economic definition for a depression, there was no doubt the country was mired in The Great Depression.

Today, economists agree that a depression exists when a recession endures for an extended period and when the GDP falls by 10% or more.  

Perhaps the most memorable description of a depression was presented by candidate Ronald Reagan in a 1980 Labor Day Speech describing Jimmy Carter’s faltering economic platform;

“Let the record show that when the American people cried out for economic help, Jimmy Carter took refuge behind a dictionary.  Well, if it’s a definition he wants, I’ll give him one.  A recession is when your neighbor loses his job.  A depression is when you lose yours.  And, recovery is when Jimmy Carter loses his.”

To voters, Reagan’s speech was poignant.  The reality is that while the difference between recession and depression is an economic distinction, the American public takes both conditions personally.  Everyman wants a job and looks to elected officials to put differences aside and stem the tide by approving whatever legislation is necessary to get the economy back on track.  

When confronted by a prolonged recession or depression, the American voters want answers and solutions.  In the wake of severe personal financial strain, Americans expect government to pull out the stops and take whatever action is necessary to decrease unemployment and cure the credit crises.

Tags: economic depression, Economy, recession

This entry was posted on Monday, March 2nd, 2009 at 11:06 am and is filed under Economy, recession. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.