Jargon Du Jour - Recession and Depression

There is an old Bob Hope joke that goes, "a recession is when your neighbor loses his job, a depression is when I lose my job." All kidding aside, there are some technical definitions for recessions and depressions, and you will get dinged on your homework if you use these terms incorrectly.

Recession: When real GDP declines for two consecutive quarters. Recessions are a part of the natural business cycle, where we have expansion followed by periods of retraction.

Depression: When real GDP declines by more than 10%, and typically lasts for more than three quarters. Unlike recessions, the economy requires some economic interventions such as fiscal or monetary stimulus in order to dig itself out of a depression.

For example, the Great Depression started in August of 1929 that lasted to March 1933 - real US GDP fell over 30%.  There was a brief recovery period followed by a second depression from 1937-1938 when the government reinstated austerity measures to pay down the debt. Since then, the US economy has suffered several recessions but has not experienced a depression.

Blinder and Zandi on the Great Recession

Here is an article about how fiscal stimulus effected the US economy after the great recession. It was written by the Chief Economist at Moody's Analytics, Mark Zandi, and an Economics Professor at Princeton, Alan Blinder. Blinder also served on the Federal Reserve Board during the '90's.

End of the Great Recession - Blinder and Zandi

...we estimate that, without the government’s response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.