Are We in a Recession or a Depression?

Are we in a recession or a depression? Economic experts disagree. A recession is generally defined as a reduction of a nation's gross domestic product (GDP) – that is, the total output of goods and services produced by labor and property located within that country – for at least two consecutive quarters. According to experts, the last real recession that the United States experienced was between 1973 and 1975, when the nation's GDP fell by almost 5 percent. On the other hand, although no 'standardized' definition exists, the term economic depression is widely used to describe a deep (greater than 10 percent fall in GDP) and sustained (lasting at least three years) recessionary period.

Indeed, the Great Depression saw a decline in gross domestic product. If you have older parents or grandparents that remember the stock market crash of 1929 (in which the GDP fell approximately 33 percent), they'll probably be able to recount in vivid detail the incredible hardship that was daily life back then – long bread lines; food stamps; indescribable unemployment; the loss of homes, businesses, and for many individuals, just about everything they owned.

But, in the wake of that tragic time, American policymakers began actively managing the economy with a handful of tools, including interest rate adjustments and massive government spending to spur growth. As a result, since 1945 there have only been ten boom-and-bust cycles, most of them much shallower than earlier ones, and the nation's unemployment rate has never climbed above 9.7 percent.

Recent statistics from the U.S. Bureau of Economic Analysis have stated that "real gross domestic product increased at an annual rate of 2.8 percent in the second quarter of 2008, (that is, from the first quarter to the second quarter). In the first quarter, real GDP increased 0.9 percent." However, in a September 2008 Forbes article: "The government reported August new homes sales shrank by 11.5 percent to 460,000 homes, from 520,000 in July, marking the housing market's slowest pace in 17 years. The report does not bode well for builders who already face a large glut of tough-to-sell inventory. Analysts had expected August sales of 510,000, according to The Trade News. The average price of a new home sold in August fell by 11.8 percent to $263,900, from July's $299,100."

But as the Internet boom and recent housing bubble demonstrate, even relatively stable economic periods can be part of a cycle of extreme ups and downs. The prolonged expansion that ended just a short time ago had an unusually long run of more than six years. As a result, some pundits now speculate that the downturn will be equally drawn out.

One expert is of the opinion that "even if consumer confidence were to collapse completely, that occurrence by itself would not be enough to trigger a depression. For the situation to become truly calamitous, many of the nation's financial institutions would have to fail concurrently with a significant rise in unemployment. If banks suddenly began closing, or it became impossible for businesses to gain access to short-term lines of credit, things would begin to spiral out of control."

Sound familiar?

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