A recession is when your neighbor loses his work; a depression is when you lose your job, according to economists.
The joke’s premise is that neither “recession” nor “depression” are well defined terms, hence the distinction between them is blurry to the point of disappearance. (Economists enjoy making jokes about depressions and recessions since they are immune to them, particularly if they have tenure.) All significant economic downturns, of which there had been many, were referred to as “depressions” until after World War II. The Great Slump was named after the 1930s depression, which was the worst in modern history. Surprisingly, weaker depressions, past and future, were termed (or relabeled, in the case of earlier depressions) “recessions” when this happened. Before the second global war, what we now refer to as “World War I” was referred to as “the Great War.” Despite the fact that the 1914-1918 war was determined to be the most expensive war in history in terms of cost, number of casualties, and political implications, the term “war” was not abolished as the name of previous battles. People did not begin to refer to the “American Civil War” or the “Napoleonic Wars.” However, nowadays, anything that doesn’t compare to the Great Depression in terms of GDP decline, unemployment decline, or some other measure of economic loss is referred to as a “recession,” including the current economic downturn, which some have dubbed “the Great Recession” due to its severity (unrivaled since the Great Depression).
All of this demonstrates that the use of language in the United States is debased; we already knew that, and I am a linguist. What’s more fascinating and significant is how the media and economists define a recession. (The only acknowledged definition of depression these days is “similar to the Great Depression.”) The media defines it as a drop in Gross Domestic Product (the market value of all goods and services sold in the economy) for two consecutive quarters, which is a rough but adequate definition, except that it does not allow the start of the recession to be pinpointed to a month. The National Bureau of Economic Research use a similar metric, but it considers other economic indicators besides GDP, such as unemployment, thus therefore is unable to “call” a recession when it begins because protraction is one of the requirements. It took nearly a year to determine that the current “recession” (I refer to it as a “depression” because of the dire budgetary and political repercussions) began in December 2007.
But the real question is when a recession will finish. When GDP stops declining, the media declares it over; economists declare it over when it begins to rise. Both definitions are deceptive, as evidenced by the current situation’s statistics.
Assume that GDP in 2007 was 100 for the sake of simplicity. It was less than four tenths of a percent higher in 2008, thus 100.4. It decreased by 1.6 percent in the first quarter of 2009, falling at an annual rate of 6.4 percent. It fell at an annual pace of 1% in the second quarter, which translates to a quarter-over-quarter decrease of.25 percent. As a result, GDP was 98.55 by the end of July, compared to 100 in 2007. Assume it is unchanged in the third quarter of this year and increases at a 1% annual pace in the fourth quarter (i.e., it rises by .25 percentapproximately; I am doing some minor rounding). (These are hypothetical numbers; I am not forecasting.) The total GDP for 2009 would be 98.8. Since 2007, this appears to be a minor drop. This, however, ignores the GDP trend line. GDP rises at an inflation-adjusted pace of roughly 3% per year on average (all of my figures are inflation-adjusted). As a result, GDP in 2008 “should” have been 103, and in 2009, 106. As a result, it would be 7.2 percent below trend at 98.8. Despite this, most journalists, economists, and government officials would say that the recession “finished” in the third or fourth quarter of 2009, based on my data.
Similarly, the Great Depression ended in 1933, when GDP began to recover, despite the fact that GDP was a third lower than it had been in 1929 and unemployment was at 25%.
A preferable definition, in my opinion, would be that a recession (or depression) ends when GDP returns to (or near) its trend line, which would provide a more realistic view of the business cycle. The economy is in jeopardy until it happens, and measures to hasten recovery should be considered. Otherwise, people would say: the recession is gone, so let’s forget about the economy for a bit, even if unemployment is still rising, foreclosures are on the rise, defaults and bankruptcies are on the rise, and the economy is operating in an entirely unsatisfactory manner. At that point, there may be little that can be done but wait for economic “nature” to take its course; yet, complacency and false optimism should be avoided.
When is a recession declared over?
That is an excellent question. Unfortunately, there isn’t a standard answer, however there is a well-known joke about the difference between the two that economists like to tell. But we’ll return to that eventually.
Let’s start with a definition of recession. As previously stated, there are various widely accepted definitions of arecession. Journalists, for example, frequently define a recession as two consecutive quarters of real (inflation adjusted) gross domestic product losses (GDP).
Economists have different definitions. Economists use the National Bureau of Economic Research’s (NBER) monthly business cycle peaks and troughs to identify periods of expansion and recession. Starting with the December 1854 trough, the NBER website tracks the peaks and troughs in economic activity. A recession, according to the website, is defined as:
A recession is a widespread drop in economic activity that lasts more than a few months and is manifested in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins when the economy reaches its peak of activity and concludes when it hits its lowest point. The economy is expanding between the trough and the peak. The natural state of the economy is expansion; most recessions are temporary, and they have been uncommon in recent decades.
While there is no universally accepted definition for depression, it is generally said to as a more severe form of recession. Gregory Mankiw (Mankiw 2003) distinguishes between the two in his popular intermediate macroeconomics textbook:
Real GDP declines on a regular basis, the most striking example being in the early 1930s. If the period is moderate, it is referred to as a recession; if it is more severe, it is referred to as a depression.
As Mankiw pointed out, the Great Depression was possibly the most famous economic slump in US (and world) history, spanning at least through the 1930s and into the early 1940s, a period that actually contains two severe economic downturns. Using NBER business cycle dates, the Great Depression’s first slump began in August 1929 and lasted 43 months, until March 1933, significantly longer than any other contraction in the twentieth century. The economy then expanded for 21 months, from March 1933 to May 1937, before experiencing another dip, this time for 13 months, from May 1937 to June 1938.
Examining the annual growth rates of real GDP from 1930 to 2006 is a quick way to highlight the differences in the severity of economic contractions associated with recessions (in chained year 2000dollars). The economy’s annual growth or decrease is depicted in Chart 1. The gray bars show recessions identified by the National Bureau of Economic Research. The Great Depression of the 1930s saw the two most severe contractions in output (excluding the post-World War II adjustment from 1945 to 1947).
In a lecture at Washington & Lee University on March 2, 2004, then-Governor and current Fed Chairman Ben Bernanke contrasted the severity of the Great Depression’s initial slump with the most severe post-World War II recession of 1973-1975. The distinctions are striking:
Between 1929 and 1933, when the Depression was at its worst, real output in the United States plummeted by over 30%. According to retroactive research, the unemployment rate grew from roughly 3% to nearly 25% during this time period, and many of those fortunate enough to have a job were only able to work part-time. For example, between 1973 and 1975, in what was likely the most severe post-World War II U.S. recession, real output declined 3.4 percent and the unemployment rate soared from around 4% to around 9%. A steep deflationprices fell at a rate of about 10% per year in the early 1930sas well as a plunging stock market, widespread bank failures, and a spate of defaults and bankruptcies by businesses and households were all aspects of the 1929-33 fall. After Franklin D. Roosevelt’s inauguration in March 1933, the economy recovered, but unemployment remained in double digits for the rest of the decade, with full recovery coming only with the outbreak of World War II. Furthermore, as I will show later, the Depression was global in scale, affecting almost every country on the planet, not just the United States.
While it is clear from the preceding discussion that recessions and depressions are serious matters, some economists have suggested that there is another, more casual approach to describe the difference between a recession and a depression (recall that I promised a joke at the start of this answer):
What causes a recession to end?
Economists have classified historical periods in terms of the dates when economic activity peaked before entering a period of decline at least since the work of Wesley Mitchell about a century ago. A trough is the lowest point on the way down, and the period between the peak and the trough is known as an economic recession. The graph below depicts Buffett’s chosen metric, real GDP per person. It is represented on a logarithmic scale, with a change of 10 units on the vertical axis roughly corresponding to a 10% change in real GDP per capita. Vertical lines on the graph reflect NBER dates for business cycle peaks and troughs.
According to conventional wisdom, the recession ends when the economy begins to recover again, not when it has rebounded to the point that metrics like real GDP per person have reached new all-time highs. The latter criteria would always give you a later date than the genuine low point for economic activity, and a significantly later date in the case of a deep downturn and sluggish recovery like the one we’ve just experienced.
For the past 150 years or so, economists have used the term “recession” to refer to the period between a peak and a trough. Is it legal for Warren Buffett and the common-sense Americans on whose behalf he purports to speak to argue that we have been using the phrase inappropriately? I believe they have every right to have an opinion on this because the occurrences that economists designate as recessions are universally recognized as having an impact on everyone’s lives. As a result, it’s only natural that everyone feels qualified to discuss what the term “recession” should imply based on personal and direct experience. People are aware that they are still not back to where they were, and the statistics back this up. When economists say the recession is finished, however, they never claim that things have returned to normal.
So, in part, it’s just a semantic issue with how a term is defined. Economists use the term “recession” to refer to a tightly defined occurrence, whereas many others understandably want to be able to discuss the long-term effects of the event.
But I believe there is more to this than a semantic issue at hand. Economists argue the recession, in the sense that we use the term, has been ended for more than a year since conditions have been progressively improving rather than deteriorating. True, things haven’t improved as much as we’d hoped or expected, and they haven’t improved enough to put us back in the position we were in before the recession. Nonetheless, for the past 15 months, situations have been improving rather than worsening.
And that is a crucial truth that is often overlooked in the mainstream discussion of these concerns.
Is there going to be a recession in 2021?
Unfortunately, a worldwide economic recession in 2021 appears to be a foregone conclusion. The coronavirus has already wreaked havoc on businesses and economies around the world, and experts predict that the devastation will only get worse. Fortunately, there are methods to prepare for a downturn in the economy: live within your means.
What is the state of the economy in 2021?
Indeed, the year is starting with little signs of progress, as the late-year spread of omicron, along with the fading tailwind of fiscal stimulus, has experts across Wall Street lowering their GDP projections.
When you add in a Federal Reserve that has shifted from its most accommodative policy in history to hawkish inflation-fighters, the picture changes dramatically. The Atlanta Fed’s GDPNow indicator currently shows a 0.1 percent increase in first-quarter GDP.
“The economy is slowing and downshifting,” said Joseph LaVorgna, Natixis’ head economist for the Americas and former chief economist for President Donald Trump’s National Economic Council. “It isn’t a recession now, but it will be if the Fed becomes overly aggressive.”
GDP climbed by 6.9% in the fourth quarter of 2021, capping a year in which the total value of all goods and services produced in the United States increased by 5.7 percent on an annualized basis. That followed a 3.4 percent drop in 2020, the steepest but shortest recession in US history, caused by a pandemic.
Are we currently experiencing a depression?
According to new research from Boston University School of Public Health, the high rate of depression has continued into 2021, and has even deteriorated, rising to 32.8 percent and harming one in every three American citizens.
What causes a downturn?
A lack of company and consumer confidence causes economic recessions. Demand falls when confidence falls. A recession occurs when continuous economic expansion reaches its peak, reverses, and becomes continuous economic contraction.
What will the state of the economy be in 2022?
“GDP growth is expected to drop to a rather robust 2.2 percent percent (annualized) in Q1 2022, according to the Conference Board,” he noted. “Nonetheless, we expect the US economy to grow at a healthy 3.5 percent in 2022, substantially above the pre-pandemic trend rate.”
Lower Prices
Houses tend to stay on the market longer during a recession because there are fewer purchasers. As a result, sellers are more likely to reduce their listing prices in order to make their home easier to sell. You might even strike it rich by purchasing a home at an auction.
Lower Mortgage Rates
During a recession, the Federal Reserve usually reduces interest rates to stimulate the economy. As a result, institutions, particularly mortgage lenders, are decreasing their rates. You will pay less for your property over time if you have a lower mortgage rate. It might be a considerable savings depending on how low the rate drops.
What will the US GDP be in 2021?
In addition to updated fourth-quarter projections, today’s announcement includes revised third-quarter 2021 wages and salaries, personal taxes, and government social insurance contributions, all based on new data from the Bureau of Labor Statistics Quarterly Census of Employment and Wages program. Wages and wages climbed by $306.8 billion in the third quarter, up $27.7 billion from the previous estimate. With the addition of this new statistics, real gross domestic income is now anticipated to have climbed 6.4 percent in the third quarter, a 0.6 percentage point gain over the prior estimate.
GDP for 2021
In 2021, real GDP climbed by 5.7 percent, unchanged from the previous estimate (from the 2020 annual level to the 2021 annual level), compared to a 3.4 percent fall in 2020. (table 1). In 2021, all major components of real GDP increased, led by PCE, nonresidential fixed investment, exports, residential fixed investment, and private inventory investment. Imports have risen (table 2).
PCE increased as both products and services increased in value. “Other” nondurable items (including games and toys as well as medications), apparel and footwear, and recreational goods and automobiles were the major contributors within goods. Food services and accommodations, as well as health care, were the most significant contributors to services. Increases in equipment (dominated by information processing equipment) and intellectual property items (driven by software as well as research and development) partially offset a reduction in structures in nonresidential fixed investment (widespread across most categories). The rise in exports was due to an increase in products (mostly non-automotive capital goods), which was somewhat offset by a drop in services (led by travel as well as royalties and license fees). The increase in residential fixed investment was primarily due to the development of new single-family homes. An increase in wholesale commerce led to an increase in private inventory investment (mainly in durable goods industries).
In 2021, current-dollar GDP climbed by 10.1 percent (revised), or $2.10 trillion, to $23.00 trillion, compared to 2.2 percent, or $478.9 billion, in 2020. (tables 1 and 3).
In 2021, the price index for gross domestic purchases climbed 3.9 percent, which was unchanged from the previous forecast, compared to 1.2 percent in 2020. (table 4). Similarly, the PCE price index grew 3.9 percent, which was unchanged from the previous estimate, compared to a 1.2 percent gain. With food and energy prices excluded, the PCE price index grew 3.3 percent, unchanged from the previous estimate, compared to 1.4 percent.
Real GDP grew 5.6 (revised) percent from the fourth quarter of 2020 to the fourth quarter of 2021 (table 6), compared to a fall of 2.3 percent from the fourth quarter of 2019 to the fourth quarter of 2020.
From the fourth quarter of 2020 to the fourth quarter of 2021, the price index for gross domestic purchases climbed 5.6 percent (revised), compared to 1.4 percent from the fourth quarter of 2019 to the fourth quarter of 2020. The PCE price index grew 5.5 percent, unchanged from the previous estimate, versus a 1.2 percent increase. The PCE price index grew 4.6 percent excluding food and energy, which was unchanged from the previous estimate, compared to 1.4 percent.