Recession vs. Depression

President Truman once said, "When your neighbor loses his job it's a recession, when you lose your job it's a depression."

A recession is defined as a period of two or more successive quarters where there is a decline in our gross domestic product or GDP.  If you'll remember from our last class, the GDP is defind as the total of market value of all goods and services produced within a country during a period of time, such as a quarter or a year.

A depression is a long-term recession or a very severe recession.

Recession cycles are thought to be a normal part of living in a world of inexact balances between supply and demand.  What turns a usually mild and short recession or "ordinary" business cycle into a great depression is a subject of debate and concern.

If you gathered five economists together and asked them if we are in a recession vs. depression, you would most likely get five different answers.  But if you gathered five people together who had lived through The Great Depression (1929-1939), you would get five dramatic answers.

The Great Depression was the largest and most important economic depression in world history, and it is used in the 21st century on how far a modern economy could possible fall.  Originating in United States, historians most often use the stock market crash on October 29, 1929 (Black Tuesday) as the starting date of The Great Depression.

International trade declined sharply, as did personal incomes, tax revenues, prices, and profits.  The depression ended at different times in different countries, but end of the depression in the U.S. is associated with the onset of the war economy of World War II, beginning around 1939.

Want to learn more?  Pick up a copy of John Steinbeck's novel, "The Grapes of Wrath", about the desperation faced by American farmers in the 1930s or talk to your grandparents or great-grandparents.

Class dismissed.

Welcome to Class!

The U.S. Economy – everything that is produced by all people and all companies in the U.S. – is measured by a statistic called the Gross Domestic Product or GDP.

The Gross Domestic Product is measured by two different means; real GDP and current dollar GDP.  The Bureau of Economic Analysis or BEA measures the real GDP quarterly and it is calculated by the following information:

• Imports and income from U.S. companies and people outside the country are not included,
• The effects of inflation are taken out, and
• Only the final product is counted.  In other words, if a U.S. company produces two items (like shoes and shoelaces), only the value of the higher produced item is counted (the shoe).

Current dollar GDP, a higher measurement, is that which leaves inflation into its estimate.

The GDP is important to the U.S. Economy for three reasons:

• to determine if the U.S. Economy is growing more quickly or slowly than the previous quarter or the same quarter the year before,
• to compare the size of economies throughout the world, and
• to compare the relative growth rate of economies throughout the world.

The Federal Reserve (Fed) uses GDP growth as one of its indicators when it determines if the economy needs to be stimulated or retrained.  If the GDP increases too rapidly, the Fed may raise interest rates to stem inflation.

Also, investors review GDP growth to determine if their asset allocation needs to be adjusted, comparing country GDP growth rates to determine best investment opportunities.  If you have money invested in the stock market, such an adjustment would help you determine whether you should invest in one type of fund vs. another.

The bell just rang and you are free for the day!

Next up:  Recession vs. Depressions, Gas Prices, and the Mortgage Crisis.