What is a Recession?

How do you tell the difference between a recession and a depression, asks the joke? A recession is when a neighbor loses their job; a depression is when you lose yours. Seriously, how do we define a recession?

The ‘quick and dirty’ definition is two consecutive quarters (or six months) of negative growth. Growth is usually defined by gross domestic product (GDP), a term that measures the total amount spent on goods and services in a country in a given period (often quarterly or annually). If the total increases, the economy is expanding – if it declines, the economy is in a downturn.

Ah, if it were only that easy. US recessions are officially declared by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER). If calling a recession were a sport, they are the umpires. The Committee writes, “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.” And they wonder why people have a hard time understanding economists.

Using the ‘quick and dirty’ analysis, the current recession would have begun in July 2008. GDP contracted at a -0.5% annual rate in the third quarter and -3.8% annual rate in the fourth quarter. But our economic ‘umpires’ announced last December that the recession actually began in December 2007, when growth and employment peaked.

So this downturn has already lasted a year, and it doesn’t look like we’re out of the woods yet. 

How does that compare? 

In the past 50 years, we have had eight recessions, averaging just under a year each. The longest two lasted sixteen months. The Great Depression lasted roughly a decade, from the Crash of 1929 until just before the onset of World War II. Economists technically view it as two ‘back to back’ recessions — from 1929 to 1933 (ending with the New Deal), and a smaller dip from 1937 to 1939. All in all, this current cycle may come to be known as the Great Recession, but as of now, it is still a far cry from the Great Depression.

Extra credit: www.nber.org or http://www.nber.org/cycles/dec2008.html

*Lisa Kaess has worked as an economist, capital markets analyst, and consultant. This article
was published in The Nyack Villager, April 2009.

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