Recession or Depression -- What's Worse?
As Ecomomic Uncertainty Mounts, People Wonder How Bad it Will Get
Dec 2, 2008
With the U.S. officially in a recession, the question on many people's minds is: What does it mean to be in a recession?
Recession Defined
A recession is popularly defined as two consecutive quarters of declining GDP (gross domestic product). For the past few months, economists, politicians and business commentators had maintained that since GDP had not declined for two quarters in a row, the U.S. was not in a recession.
In the meantime, however, prices were rising, paychecks were shrinking and consumer confidence was low. To the public, it felt like a recession, no matter what the experts said.
This week, the National Bureau of Economic Research (NBER) said that the United States was, in fact, in a recession, and had been in one since December 2007. The public had been right all along.
NBER Declares a Recession
The NBER is a widely respected private, nonprofit research organization whose mission is to promote a greater understanding of how the economy works. According to the organization, 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."
This definition of a recession is significantly broader than the commonly accepted one described above.
On December 1, 2008, the NBER announced that economic activity had peaked in December 2007. The country had been in a recession since then. The U.S. government did not dispute this statement.
Investors, unnerved by the announcement and what it meant for corporate earnings, bid stock prices down. The Dow Jones Industrial Average fell about 680 points, or 7.7%.
Clearly, a recession is a scary place to be. Is a depression worse?
Depression vs. Recession
Yes. A depression is a lengthy recession. In a depression, business activity declines, unemployment increases, prices fall, and a general panic grips the public.
During the Great Depression of the 1930s, about one out of every four American workers was unemployed. Manufacturing output had fallen by 46% from its 1929 peak. Nearly half of the 25,000 banks in the country had failed. The economy seemed to be spiraling out of control. The public was apprehensive about the future, and understandably so. In 1932, president Franklin Delano Roosevelt tried to instill hope in the American people, telling them, "We have nothing to fear but fear itself."
Economists don't expect a similar depression to occur this time. Most see the economy turning around by late 2009 or early 2010.
So though the U.S. is in a recession for now, citizens can at least take comfort in knowing that the nation probably won't return to the era of prolonged economic instability marked by a depression.
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