Recession vs. Depression

By Dawn Handschuh, Personal Finance Writer Archive

Imagine, if you will, an upcoming trip to the hospital where you'll have surgery to remove an unwanted growth. It's not pleasant, but you'll get through it. Now imagine that same surgery, but this time, you're going to have it done without anesthesia. Ouch!

That really explains the difference between a recession and a depression. It's a matter of degree, duration and how much pain you'll experience.

One popular definition of a recession is any period with two or more consecutive quarters of declining gross domestic product (GDP), while a depression is characterized as a prolonged downturn during which time the GDP falls by more than 10%.

To identify a recession, however, the National Bureau of Economic Research (NBER) moves beyond the simplistic GDP calculation and also considers rising unemployment, changes in real personal income and falling manufacturing production and wholesale/retail sales.

Using these definitions, the United States experienced only two actual depressions. Both occurred during the period known as the Great Depression. During the first one, from 1929-33, the GDP fell by over 30%; in the second one, from 1937-38, it fell by about 18%.

Depressions are caused by the same economic events that cause recessions. A depression is simply a severe and protracted recession.

While this country has experienced few official depressions, recessions have been somewhat common, and many economists view them as a natural part of business cycles that are marked by peaks and troughs. Recessions, they say, are the period in between the time that economic activity has peaked and when it has reached its low point. In recent history, recessions have occurred in 2001,1990-91, 1981-82 and 1980. Once business activity begins to pick up again, it's called an expansionary period.

According to the NBER, the United States has been in a recession since the last economic expansion ended in December 2007.