Recession and depression are often used interchangeably to describe the economy. Though they can also describe the job, housing, or manufacturing markets. Among other things. But are a recession and a depression the same thing?
Spoiler: no, they’re not.
The National Bureau of Economic Research (NBER) officially declares when we’re in a recession or depression. Deciding if we’re in a recession or not has a lot to do with GDP (Gross Domestic Product.)
What Is GDP?
The mechanics of how GDP is measured, calculated, and how they account for inflation is a bit convoluted for this article. It’s a measure of is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
If that’s a bit hard to digest, here are the cliff notes:
- GDP is the value of all finished goods and services made in a country during a set time (quarter, year, etc.)
- GDP provides an economic scorecard used to estimate the growth rate and size of an economy.
- GDP can be calculated using expenditures, production, or incomes.
- It can be adjusted for inflation.
- It, obviously, has its limitations.
Now that that’s out of the way….
What Is A Recession?
A recession is a decline in a market for a specific region. Anything from a large area, like the entire US, to a smaller portion of a country, like the east coast or New York. A recession can be in a single market – like the job market – or in a larger market, like the economy as a whole.
Historically, for the NBER to officially declare a recession, the GDP needed to be in decline for at least two quarters (six months.). This is no longer the case though, according to the NBER.
They define a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
2020 recession note: Economic experts around the world expect that economic fallout from the coronavirus will be large. They suspect it will be the worst we’ve seen since the Great Depression.
While the NBER hasn’t made any conclusive statements yet, it’s almost certain to find the economy fell into recession during 2020.
What Is An Economic Depression?
An economic depression, however, is an extended recession that lasts at least three years. Usually characterized by a decline in the real gross domestic product (GDP) of at least 10% in any year.
Since the US is a capitalist country, the economy is run by the market. This means that once the market starts to fall, it’s a downward slope. The reverse is also typically true. Once the economy starts to climb, it usually continues to do so.
How Recessions Work
The NBER generally don’t run GDP reports quarterly, they’re usually run yearly. Obviously relying on GDP reports alone would make a recession hard to spot. But there are four factors that contribute to the GDP:
- Real gross domestic product (Real GDP)
- Retail sales
The NBER also measure these four factors. Unlike GDP, these reports come out monthly. If these numbers are on the decline, the GDP reports will be as well.
Real income measures your personal income without Social Security and welfare payments. This number is adjusted for inflation. When real income is on the decline, people are less inclined to make purchases, and demand drops. This, of course, has a ripple effect in a capitalist economy.
Employment rates are an obvious indicator of economic health. It also contributes, in a large part, to real income. Real income, of course, contributes to the market and demand.
When the market and demand fall, manufacturing companies may suffer massive deficits. The NBER commissioners look at the Industrial Production Report to determine the health of the manufacturing sectors.
Though it should be noted that the health of this sector doesn’t rely on just the US economy. Manufacturers can also rely on the global economy to help offset deficits.
2020 global economy note: between COVID and Brexit, the global economy is looking pretty bleak here as well.
Wholesale And Retail Sales
Wholesale and retail are essentially two sides of the same coin. But, nonetheless, both are important indicators to the health and growth of an economy. These also go hand-in-hand with real income and employment rates.
With less money for purchases, less money goes to the stores, which can order fewer products, and in turn, the manufacturers can manufacture fewer products at a profit. Of course, this spiral can also lead to layoffs which put us in further deficit.
Recession Warning Signs
One of the first signs of a recession is a decrease in the manufacturing sector. These sectors are, essentially canaries in a coal mine. They often receive large orders months in advance, and once those are on the decline, you can likely assume other areas are on the decline even if they don’t show it in reports.
Manufacturing companies are notoriously quick to move to layoffs once business gets slow, which can either spark a recession or signal that one is underway. But even if it hasn’t hit the point of layoffs, you can be sure other sectors will slow once manufacturing hires slow to a trickle or stop completely.
Though we talk about recessions in the short term, the aftershocks of a recession can be felt for years. Typically we’ll see this as a low quarter followed by several quarters of growth, then back to a low quarter, then up again.
What’s The Difference Between Recession & Depression?
There have been 33 recessions since 1854. They lasted for 11 months on average since 1954. In that time, we’ve only had one depression; The Great Depression.
And it lasted a decade.
Though analysts argue that it was really two recessions. The first from August 1929 to March 1933, the second from May 1937 to June 1938.
And the stories we hear from this time are probably what put the fear of economic depression in us. So if you find yourself wondering, “Is this a recession or the start of a depression?” Take a deep breath and rest assured that it’s probably a recession.
During The Great Depression, national unemployment rates hit a staggering 25% and prices dropped by the same degree. Which was great for those with steady high-paying jobs, but those are obviously few and far between even now.
If you’re wondering what current unemployment rates are, you can check them monthly by state.
How Do Recessions Impact You?
Wide-spread unemployment, mass layoffs, government bailouts, bankruptcy, repossessions, and bubbles bursting is typically what we think of when we hear recession. IE: the student loan bubble, the housing bubble, the boomer bubble – you get it.
One massive issue with the student loan bubble bursting nearly simultaneously with the housing bubble was that not only could grads not find employment, but they couldn’t afford to pay back their loans – nevermind rent. And their housing situation with their ‘rents?
Precarious if they didn’t have firm footing themselves in the midst of the housing bubble and foreclosures. This kind of pattern can throw off someone’s entire career, not just their day-to-day.
But I want to point out that it’s not the younger generations that are solely stuck with this bill. Older generations who don’t have the experience operating in the climate younger generations do are laid off and forced to compete in a job market they’ve been out of for possibly decades. Competing with grads who started learning how to code in 3rd grade – something most older gens never heard of.
Pensions are lost, 401ks cashed out, loans taken out just to repay loans. When a recession happens, the majority are affected.
Job markets get hyper-competitive, leading to new and impossibly hybridized positions like, “Fullstack marketer,” or “Product Engineer,” to save the company the cash on one hire versus three. This leaves the unskilled and unqualified majority at a major loss. Highschoolers and even college students are unable to get the experience pre-grad they’d need to land solid jobs after graduation. Nevermind the older generations where the majority can’t even compete in the market.
Example Of Past Recession
If you’re over 20 – or were a particularly astute kid – you probably remember The Great Recession. Starting December 2007 and ending in June 2009. Real GDP declined in the first, third, and fourth quarters of 2008 and in the first quarter of 2009.
The first quarter of 2008 saw the GDP fall by 2.3%. The economy lost 17,000 nonfarm jobs in January 2008.
Unlike most recessions, demand for housing slowed first. Because it was housing and not manufacturing, most experts thought it was the end of the housing bubble, not the start of a new recession.
The NBER declared the Great Recession over as of the third quarter of 2009. It was the worst recession since the Great Depression. Four of the downward quarters were consecutive in 2008 and 2009. It was also the longest recession since the Great Depression, lasting for 18 months.
But when compared to The Great Depression, the differences between a recession and a depression become clear.
Are There Any Benefits To A Recession?
Recession, in short, cures inflation. The Federal Reserve walks a fine line between slowing the economy to prevent inflation without triggering a recession. When in a recession, however, inflation doesn’t occur.