What is the difference between a recession and a depression?

Suzanna De Baca -- Expert Business Source, 6/16/2008

Dear Suzanna:

What is the difference between a recession and a depression?  Are we actually in a recession?

Dear Reader:

Okay, forgive me for repeating the only joke on this subject I know:  A recession is when your neighbor loses his job and a depression is when you lose your job.  

Unfortunately, when you’re in recession or even a recessionary environment, it isn’t very funny.  While we are certainly in a period of economic decline,  we are not “officially” in a recession according to the standard definition.

The accepted definition of a recession is when there is a decline in GDP (Gross Domestic Product) for two or more quarters in a row.   Many economists dislike this definition because it doesn’t take into account certain factors such as unemployment or consumer confidence.

One of the reasons economists and politicians debate whether or not we’re in a recession is that sometimes other economic factors create an environment that, while not necessarily marked by two consecutive quarters of negative GDP growth, has seen a prolonged period of slowed or negative business activity.  In other words, it looks and feels like a recession even if it doesn’t fit the official definition.

A depression, by contrast, is essentially a recession that lasts longer and has a larger downturn in business activity.  Changes in Gross National Product (GNP) are a good indicator of whether we are in a recession or depression;  in a depression, real GDP declines in excess of 10%.  The last two depressions in the U.S. were both in the 1930s.  From August of 1929 to March 1933, real GDP declined by approximately 33%.  There was a period of recovery following this depression, but in 1937-38 the economy dipped again in a less severe depression.  All other economic downturns since that time have been recessions or just plain old tough times.

Suzanna de Baca is president of Private Capital Solutions Group. Securities offered through Broker Dealer Financial Services Corp. Member FINRA & SIPC. Investment Advisor Representative of Investment Advisors Corp., A Registered Investment Advisor. Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.