What is the Difference Between a Depression and a Recession?
Unless you have been camping in a remote location for the last 6 months you have no doubt heard that we are in a recession. There was a great deal of disagreement, for quite some time, of when we actually entered the recession but nonetheless we all agree that we are now in one. So what does this really mean? From about.com
The standard newspaper definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.
Apparently, this definition is too simplistic and doesn’t take into consideration different aspects of the economy, such as unemployment, industrial production, real income and wholesale-retail sales. Taking these things into consideration a committee known as the Business Cycle Dating Committee has their own definition of a recession.
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.
That definition is a lot more subjective and relies on a group of people. Regardless of the definition you use, everyone agrees that we are now in a recession. What happens if the economy continues to tumble the way it has over the last year? You guessed it; a depression! By definition:
A depression is any economic downturn where real GDP declines by more than 10 percent.
The good news is, based on this definition the last depression we experienced in the United States was May 1937 to June 1938. Looking at data from the Bureau of Economic Analysis, the GDP did decline over the last two quarters of 2008. I could not find any data for 2009.
The bad news is, some economists and market analysts believe we may be headed toward a depression. Whether we are heading toward a depression or things turn around before we see things get real bad, the best thing you can do for yourself is become fiscally strong. That means increase your cash reserves and eliminate debt. Sound like you have heard that before? You have, but it is something that you can’t hear too often.
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