Education | What is the difference between a recession and a depression? What is the difference between a recession and a depression? February 2007 Great question. Unfortunately, there isn’t a standard answer, although there is a well-known joke economists like to tell regarding the difference between the two. But, let’s come back to that later. Recession Let’s start by defining a recession. As I mentioned, there are several commonly used definitions of a recession. For example, journalists often describe a recession as two consecutive quarters of declines in quarterly real (inflation adjusted) gross domestic product (GDP). The definition used by economists differs. Economists use monthly business cycle peaks and troughs designated by the National Bureau of Economic Research (NBER) to define periods of expansion and contractions. The NBER website lists the peaks and troughs in economic activity starting with the December 1854 trough. The website also defines a recession as: A recession is 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. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades. Depression While there is also no standard definition for depression, it is commonly defined as a more severe version of a recession. In his popular intermediate macroeconomics textbook, Gregory Mankiw (Mankiw 2003) distinguishes between the two: There are repeated periods during which real GDP falls, the most dramatic instance being the early 1930s. Such periods are called recessions if they are mild and depressions if they are more severe. As Mankiw pointed out, perhaps the most famous economic downturn in the U.S.’s (as well as the world’s) economic history was the Great Depression, often described as starting in 1929 and lasting at least through the 1930s and into the early 1940s, a period that actually includes two severe economic downturns.

Using the NBER business cycle dates, the first downturn of the Great Depression started in August 1929 and lasted 43 months, until March 1933, far longer than any other twentieth century contraction. The economy then expanded for 21 months, from March 1933 until May 1937, before suffering another downturn: from May 1937 until June 1938, a period of 13 months, the economy again contracted. Degree of Severity One quick way to illustrate the difference between the severities of the economic contractions associated with recessions over the period from 1930 to 2006 is to examine the annual growth rates of real GDP (in chained year 2000 dollars). Chart 1 shows the annual growth or contraction in the economy. The gray bars represent recessions identified by the NBER. The two most severe contractions in output (excluding the post-World War II adjustment from 1945 to 1947) occurred during the Great Depression of the 1930s.

Chart 1: Annual growth rate of Real GDP (%) In a March 2, 2004, speech at Washington and Lee University, then Governor, and now Fed Chairman, Ben Bernanke, contrasted the severity of the initial downturn during the Great Depression and the most severe post-World War II recession of 1973-1975. The differences are telling: During the major contraction phase of the Depression, between 1929 and 1933, real output in the United States fell nearly 30 percent. During the same period, according to retrospective studies, the unemployment rate rose from about 3 percent to nearly 25 percent, and many of those lucky enough to have a job were able to work only part-time. For comparison, between 1973 and 1975, in what was perhaps the most severe U.S. recession of the World War II era, real output fell 3.4 percent and the unemployment rate rose from about 4 percent to about 9 percent.

Other features of the 1929-33 decline included a sharp deflation—prices fell at a rate of nearly 10 percent per year during the early 1930s—as well as a plummeting stock market, widespread bank failures, and a rash of defaults and bankruptcies by businesses and households. The economy improved after Franklin D. Roosevelt’s inauguration in March 1933, but unemployment remained in the double digits for the rest of the decade, full recovery arriving only with the advent of World War II. Moreover, as I will discuss later, the Depression was international in scope, affecting most countries around the world not only the United States. While you can see from the above discussion that recessions and depressions are serious business, some economists have been known to suggest that there is another more casual way to explain the difference between a recession and a depression (recall that I began this answer with a promise of a joke): When your neighbor loses their job, it’s a recession. When you lose your job, that’s a depression! References Ask Dr. Econ. May 2002. “What are business cycles and how do they affect the economy?” Federal Reserve Bank of San Francisco website.

Bernanke, Ben S. 2004. “Money, Gold, and the Great Depression” Board of Governors of the Federal Reserve System, Washington, DC. March 2, 2004. Greenwald, Douglas, Editor in Chief. The McGraw-Hill Encyclopedia of Economics. McGraw-Hill, Inc., New York, Second Edition. See Business Cycles, pages 96-104, by Geoffrey H. Moore. Mankiw, N. Gregory. 2003. Macroeconomics. Worth Publishers, New York, Fifth Edition. See Chapter 1. page 4. Difference Between a Recession and a Depression? Updated March 01, 2016. Depression Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. This leads to the simple definition of a depression as a recession that lasts longer and has a larger decline in business activity.

The Difference So how can we tell the difference between a recession and a depression? A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe. By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent. continue reading below our video 4 Tips for Improving Test Performance If we use this method then the Great Depression of the 1930s can be seen as two separate events: an incredibly severe depression lasting from August 1929 to March 1933 where real GDP declined by almost 33 percent, a period of recovery, then another less severe depression of 1937-38. The United States hasn’t had anything even close to a depression in the post-war period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent.

Countries such as Finland and Indonesia have suffered depressions in recent memory using this definition. Now you should be able to determine the difference between a recession and a depression without resorting to the poor humor of the dismal scientists. If you have a question you'd like answered about recessions, depressions, or any other economics topic, please use the feedback form. Recession: CNBC Explains CNBC Explains Thursday, 21 Jul 2011 | 12:52 PM ET CNBC.com SHARES Every few years, countries experience an economic downturns, also known as a recession. Companies lay off workers, consumers stop spending, and the average American experiences a financial pinch. But what exactly is a recession? How does it differ from a depression? And when does a recession end? Here are the basics. What is a recession? The textbook definition of a recession is a downturn in economic activity, characterized by at least two consecutive quarters of decline in a country's gross domestic product (GDP). Translation? A big drop in consumer spending ending in a loss of jobs, personal income and business profits. This is usually the result of an economic shock, such as a 'bubble' bursting.

An economic bubble happens when products, such as stocks or homes, become worth more than their actual value. When the bubble bursts, the prices of these products fall. This is usually coupled with less business investing, because business profits drastically decline. The slowdown in business investing in turn results in more bankruptcies, both personal and business, and higher unemployment rates because too many people are chasing too few jobs. What causes recessions? They usually result from an economic shock. There are many ways a shock can come about. The 2007-2009 recession was mostly blamed on a housing bubble. After a run-up in housing prices in the early part of the decade, home prices plummeted, then thousands of borrowers couldn't afford to pay their loans. Meanwhile, Wall Street sold financial instruments tied to the loans that were eventually discovered to be of little value. Looking at other recessions, we can see their 'shocks.' The recession of 2001 was caused by the 'Internet Bubble,' in which internet stocks and businesses eventually fell to much lower prices. That brought about a huge decline in business investing and a spike in unemployment. The recession of 1973-1975 in the U.S.

came about because of rocketing gas prices caused by OPEC's raising oil prices as well as embargoing oil exports to the U.S. Other major factors included heavy government spending on the Vietnam War, and a Wall Street stock crash in 1973-74. At the time, this recession was the worst in the U.S. since the Great Depression. Today, most economists believe the Great Recession of 2007-2009 superseded the 1973-1975 recession in intensity. There was even a recession during the Great Depression, say economists — and at the time it was the worst recession in the nation's history. The 'recession' in 1937 and 1938 had several causes. When the U.S. was trying to get out of the Great Depression, it spent a lot of money. That was the New Deal — President Franklin Roosevelt's plan to get the economy moving — which started in 1933. But as the economy appeared to be recovering in 1937 and because Congress wanted to balance the budget, the government pulled back on spending and then raised taxes.

That was enough of a 'shock' to put the economy into recession. Unemployment rose again and business profits declined, as did business investing. As a result, the Great Depression continued, economists say, until the U.S. entered World War II in 1941. What's the difference between a recession and a depression? Harry Truman, the 33rd president , is credited with saying, "A recession is when your neighbor loses his job. A depression is when you lose yours." A depression is a far more serious downturn in a country's economic growth for a longer period of time, resulting in much higher unemployment and much less spending by consumers, than a recession. That's why the Great Depression of the late 1920's and 1930's was called just that. The economic suffering was long and painful. In fact, the term recession became more commonplace after World War II to describe an economic downturn less severe than a depression. Before that, almost all economic downturns in the U.S. were called depressions or panics. The Great Depression was primarily started by the Wall Street crash of 1929, as well as bank failures in the early 1930's.

Depositors' money was not insured by the Federal Government as it is now. That insurance is a legacy of the New Deal. Also helping to bring on the Great Depression were protectionist trade policies to help boost American businesses but put higher prices on products—plus a severe drought in the Midwest known as the Dust Bowl that put thousands of farmers out of work. The U.S. hasn’t experienced anything close to a depression since World War II. Can a recession get worse? Yes. It can become a depression — meaning the economic slowdown can deepen and go on for a longer time. There hasn't been an official case of that transition yet, but as noted above, the 1937-38 recession helped prolong the Great Depression. A recession can also 'double dip.' This is often referred to as a W-shaped recession. That means a recession can end for a time but come roaring back because of another economic shock. Economists point to a double dip recession in the 1980's. The first part of the double dip started in January 1980 and lasted through July of that year. After the economy started growing for a while—and considered out of recession—the Federal Reserve raised interest rates to stop inflation.

That turned out to be an economic shock and sent the country into another recession from July 1981 to November 1982. That made it a double dip. When Does a Recession End? Technically, a recession ends when economists say it does, but those on the streets may feel differently. The National Bureau of Economic Research —an independent group of economists—is charged with the official proclamation of a U.S. recession's end. In general, however, a recession ends when the economy starts to grow for a period of time, usually two or more business quarters. That means companies are hiring again, consumers are spending, and businesses are investing. That doesn't mean everyone has gotten their jobs back or businesses are investing more than before the recession. It just means a country's overall economy is expanding or growing on a somewhat more consistent basis. Business Economic Cycle Recession Depression Define Explain Recessions are the low points of the normal economic cycle. A depression is defined as a recession that is unusually long lasting and severe. What is the business cycle? The term business cycle is used in several ways in business. This article defines business cycle in context with related terms including economic cycle, recession, and depression.

Business Cycle for Country Economy Firstly, the primary meaning of business cycle refers to fluctuations in economic output in a country or countries. These are the well known phases of the business cycle such as recession, depression, recovery, and expansion. Economic cycle is another name for the same cycle. This business cycle often parallels changes in stock market prices, which are part of the stock market cycle. For more on these cycles and their phases, see the sections below. Business Cycle for Company Life Span Stages Secondly, the term business cycle sometimes refers to stages in the lifespan of a single company. In this sense, important stages in one company's lifespan may include the following: Birth (or Start up) stage Initial Growth stage Change into different company (e.g., through merger or acquisition) The economic business cycle (first meaning above) can impact stages of the company business cycle (second meaning). Birth and Growth stages tend to accelerate during economic recovery and expansion, of course. Company Decline and Demise occur faster during economic recession and depression. Do companies have a finite lifespan? It makes practical sense for accountants to view companies as ongoing entities that will continue in business indefinitely. In reality, however, most business start ups move through all six stages and cease business within a few years.

Regarding US S&P 500 Index companies, research by Richard Foster seems to show a recent rapid decline in average company lifespan. Average lifespan fell from 61 years in 1958 to just 18 years in 2015.1 Depending on how one defines lifespan, however, that decline may not be as severe as it seems. Foster also finds that many companies now avoid Demise by instead Changing into a different company. These changes usually come through mergers and acquisitions. Arguably, such events do not truly end company life. Essentially the same companies continue life as different legal entities, under different names. Business Cycle For An Ongoing Company Thirdly, business cycle also refers to a repeating series of phases in the life of an ongoing business. The series may cover a year or several years, and then repeat many times during the company's life. Note especially that a business cycle in this sense might include stages such as these: Firstly, the company takes in revenues from normal operations for a year or more. Secondly, leaders and analysts re-evaluate company business performance and growth prospects. For this, they give special attention to evaluating: Company business model performance.

Here, they will focus especially on their pricing and margin models. Competitive strategy effectiveness. Thirdly, leaders adjust or change the business model and strategies. Successful strategies and models undergo fine tuning. Failing Strategies and models are replaced. Finally, company resumes business for another period before re-evaluating again. Contents Are there known causes and cures for the economic business cycle? Defining business cycle phases: Recession, depression, recovery and expansion. The primary meaning of business cycle and economic cycle refers to changes in economic activity within a country or countries. Because these two terms refer to the same cycle, they are interchangeable. Economists define the cycle in terms of economic output, which they measure as the country's gross domestic product (GDP). Note that GDP is simply the market value of all goods and services produced within the country during a year. And, when multi-national companies produce in other countries, that activity is not part of home country GDP. The image below shows how the rising and falling GDP produces business cycle phases. The image also shows another cycle, the stock market cycle. This typically runs more or less parallel to the business cycle, but ahead of the business cycle.

Some analysts, therefore, see the stock market cycle as a leading indicator of forthcoming business cycle phases. Business cycle phases and stock market cycle phases, including recession, depression, trough, recovery, expansion and peak. Economists sometimes define Recession as two consecutive quarters of decline in the GD. And, they describe Depression as a severe and sustained recession. The GDP of most countries tends to grow over time, as the Long Range Growth line in the figure suggests. The long range growth line is essentially a baseline. Economic output fluctuates around the baseline with different business cycle phases. Note that stock market prices usually rise or fall ahead of like changes in the economy (GDP). In reality, these cycles tend to be less predictable, less regular, and less smooth than the figure above suggests. The length, severity, and sequence of phases may differ from what the figure shows. Seasonal cycles are different from economic cycles Do not confuse the business (economic) cycle with seasonality or seasonal fluctuations in business. Fluctuations due to seasonality tend to impact some businesses and industries more than others. And, they are tied predictably to calendar seasons or to short-lived fads.

Instead, the business (economic) cycle has broad impacts across companies, industries, and calendar seasons. Business cycle impacts GDP figures are the primary evidence for the business cycle. It is not surprising, therefore, that people who contribute directly to the GDP feel life cycle phase changes most keenly. They feel changes in areas such as these: Employment and unemployment. Also, in hiring rates. Wholesale sales and retail sales. And, especially, consumer sales. New building loans and new building starts. Also in mortgage rates. Building closures and property foreclosures. Business start ups and business growth. Also, business failures. What is the difference between a recession and a depression? In the United States, economists define recession as two consecutive quarters of decline in the GDP. The National Bureau of Economic Research(NEBR) provides this definition, but it is not, however, the only definition in use. An alternate definition even appears within the NEBR, from its Business Cycle Dating Committee. This committee reviews several economic indicators, including employment, real income, retail sales, and other factors. As a result, It defines a recession as the period of time between the peak and a trough in the above chart.

The term recession did not appear until the time of the Great Depression of 1929-33.Prior to that, the term depression could refer to any decrease in economic output. "Recession" was coined at this time to distinguish between the severe conditions of the early 1930s,on the one hand, and lesser economic downturns, on the other hand, such as those occurring in 1910 and 1913. The term depression usually means an economic downturn that is longer lasting and more severe than the more frequently occurring recessions. Sometimes, in order to define the term more formally, a depression is said to begin when GDP declines more than 10% from the most recent economic peak. By this criterion, the last two real depressions in the United States occurred in these periods: From 1929 to 1933—the Great Depression—where US GDP declined by nearly 33% and unemployment rose to 25%. In 1937-38, where GDP declined by more than 18% and unemployment reached 19%.

By contrast, US GDP declined at most 5% in the severe recession of 1973-75. In general, periods of economic depression are characterized by greatly reduced GDP, as well as severely high measures of unemployment, foreclosures, business closures, and greatly reduced wholesale and retail sales activity. Are there known causes and cures for the economic business cycle? During recessions and depressions governments and private industry alike are keenly motivated to act on measures that might move the economy back into recovery and expansion. Any attempt to remedy economic downturn, however, should start with an understanding of why downturns occur in the first place. And, it would be helpful to know which factors trigger recovery. This subject is central to the field of macroeconomics. Not surprisingly, this field is characterized by competing theories and speculation, but few established "laws." A few factors are in fact known to be associated with upturns or downturns in the economy. However, the extent to which they are either causes or results is less well known. These factors include the following: An imbalance or balance between country money supply, inflation, and interest rates. In the United States, the Federal Reserve Board (FRB) is responsible for keeping this balance.

Excessive government spending. Deficit spending is especially detrimental when spent outside the country or on non productive domestic programs. Consumer and business optimism or pessimism. Here, spending depends heavily on consumer expectations for business growth and inflation. Large increases or decreases in the price of oil. Weak demand for goods and services. The latter factor, weak demand, is a central focus in so-called Keynesian economics (after John Maynard Keynes). Since the 1930s, governments with capitalist economies have held—to some degree—a Keynesian view. This view holds that during recessions and depressions, government should increase aggregate demand by doing the following: Firstly, increase the money supply. Secondly, increase government spending. And reduce taxes. ______________________ Economic scarring: The long-term impacts of the recession | Economic Policy Institute Economic scarring: The long-term impacts of the recession Report • By John Irons • September 30, 2009 Briefing Paper #243 Download PDF Executive summary Economic recessions are often portrayed as short-term events. However, as a substantial body of economic literature shows, the consequences of high unemployment, falling incomes, and reduced economic activity can have lasting consequences.

For example, job loss and falling incomes can force families to delay or forgo a college education for their children. Frozen credit markets and depressed consumer spending can stop the creation of otherwise vibrant small businesses. Larger companies may delay or reduce spending on R&D. In each of these cases, an economic recession can lead to “scarring”—that is, long-lasting damage to individuals’ economic situations and the economy more broadly. This report examines some of the evidence demonstrating the long-run consequences of recessions. Findings include: Educational achievement: Unemployment and income losses can reduce educational achievement by threatening early childhood nutrition; reducing families’ abilities to provide a supportive learning environment (including adequate health care, summer activities, and stable housing); and by forcing a delay or abandonment of college plans. Opportunity: Recession-induced job and income losses can have lasting consequences on individuals and families. The increase in poverty that will occur as a result of the recession, for example, will have lasting consequences for kids, and will impose long-lasting costs on the economy. Private investment: Total non-residential investment is down by 20% from peak levels through the second quarter of 2009. The reduction in investment will lead to reduced production capacity for years to come.

Furthermore, since technology is often embedded in new capital equipment, the investment slowdown can also be expected to reduce the adoption of new innovations. Entrepreneurial activity and business formation: New and small businesses are often at the forefront of technological advancement. With the credit crunch and the reduction in consumer demand, small businesses are seeing a double squeeze. For example, in 2008, 43,500 businesses filed for bankruptcy, up from 28,300 businesses in 2007 and more than double the 19,700 filings in 2006. Only 21 active firms had an initial public offering in 2008, down from an average of 163 in the four years prior. There is also substantial evidence that economic outcomes are passed across generations. As such, economic hardships for parents will mean more economic hurdles for their children. While it is often said that deficits can cause transfers of wealth from future generations of taxpayers to the present, this cost must also be compared with the economic consequences of recessions that are also passed to future generations. This analysis also suggests that efforts to stimulate the economy can be very effective over both the short- and long-run.

Using a simple illustrative accounting framework, it is shown that an economic stimulus can lead to a short-run boost in output that outweighs the additional interest costs of the associated debt increase. This is especially true over a short horizon. A recession, therefore, should not be thought of as a one-time event that stresses individuals and families for a couple of years. Rather, economic downturns will impact the future prospects of all family members, including children, and will have consequences for years to come. The American Recovery and Reinvestment Act (ARRA) passed earlier this year included tax cuts, transfers to state governments, and direct spending. The Obama administration has projected that the package would create or save 3.5 million jobs across the economy by the end of 2010 (Council of Economic Advisors 2009), with a 10-year budgetary cost of $787 billion. The impact of the package will likely reach well beyond short-term job creation. The increased spending will stimulate the broader economy, leading to greater economic output, greater national income, and a consequent boost in federal revenue (which would offset some of the initial cost).

This boost to overall economic activity will also have long-term benefits to the economy by averting many of the costs that come along with recessions. And because the package also includes public investments in areas such as transportation infrastructure, energy efficiency, and education, it will yield economic dividends in years to come. Too often the costs and benefits of fiscal stimulus are compared on unequal footing. The initial price tag of the recovery package, for example, is frequently portrayed as a one-time cost in revenue that would yield a one-time boost to the economy. However, the reality is that both the costs and benefits have ripple effects that should be considered over the long term. For example, economically stressed families find it more difficult to start new businesses, send their kids to college, or train for a new career. New entrants into the labor market are more likely to be un- or under-employed, which can have a lasting impact on their career paths and future income. An immediate boost to the economy in the near term can thus have lasting effects. Since the recovery package is funded through deficit spending (as it should be in order to maximize its impact), the true cost is spread out over a long period of time as well.

Further, it is often said that deficits can cause transfers of wealth from future generations of taxpayers to the present. While true, this cost must also be compared with the economic consequences of recessions that are also passed to future generations. This Briefing Paper examines the potential long-run implications of the recession on families, businesses, and the economy. Short-term economic conditions can and do have long-lasting effects, including on: education; individual and family opportunities; private investments and technology; and entrepreneurial activity. This report then uses a simple accounting framework to better judge the impacts on the economy. Such an analysis clearly shows that a temporary increase in federal spending—especially during an economic downturn—leads to an increase in national income in the near term, while spreading out the costs over many years. An evaluation of the recovery package should thus include the short-term boost to gross domestic product (GDP) and jobs; the long-term benefits of avoiding the scarring of a more severe recession; and the long-term interest costs of adding to the national debt (rather than the short-term fiscal impact). Long-run impacts: “Scarring” The traditional analysis of fiscal stimulus typically looks at the short-run impact of fiscal policy on GDP and job creation in the near term.

However, economists have long recognized that short-run economic conditions can have lasting impacts. For example, job loss and falling incomes can force families to delay or forgo a college education for their children. Frozen credit markets and depressed consumer spending can stop the creation of otherwise vibrant small businesses. Larger companies may delay or reduce spending on R&D. In each of these cases, an economic recession can lead to “scarring”—that is, long-lasting damage to individuals’ economic situations and the economy more broadly. The following sections detail some of what is known about how recessions can lead to long-term damage. Economic damage Recessions result in higher unemployment, lower wages and incomes, and lost opportunities more generally. Education, private capital investments, and economic opportunity are all likely to suffer in the current downturn, and the effects will be long-lived. While economies often see rapid growth during recovery periods (as unused capacity is returned to work), the drag due to the long-term damage will still prevent the recovery from reaching its full potential. Education As noted by many researchers, education—or “human capital”—plays a critical role in driving economic growth.

For example, Delong, Golden, and Katz (2002) state that “human capital has played the principal role in driving America’s edge in twentieth-century economic growth.” As such, factors that lead to fewer years of educational attainment for the nation’s youth will have substantial consequences for years to come. Recessions can impact educational achievement in a number of ways. First, a substantial body of literature addresses the importance of early childhood education (see, e.g., Heckman (2006, 2007) and the papers cited therein). Because education at this level (either pre-k or even earlier) is primarily driven by parental options and funding, factors that reduce families’ resources will impact the level and quality of education available to their children. For example, Dahl and Lochner (2008) find a direct effect of family income on math and reading test scores. Furthermore, there is evidence that early childhood nutrition impacts cognitive development. Studies in developing countries have shown that improved nutrition can lead to greater grade attainment, reading comprehension, cognitive abilities, and ultimately wages later in life (see, e.g., Ruel and Hoddinott (2008) and Hoddinott et al.

(2008)). The Dahl and Lochner results also suggest that the income impact is larger for families with younger children. In a recession—when many families face financial hardships and poverty is rising—childhood nutrition can suffer. In 2007, 13 million U.S. households, including 12.7 million children, experienced “food insecurity”—or difficulty providing enough food for all family members; 4.7 million families faced a more severe disruption in the normal diet for some members (Nord et al. 2008). These numbers will almost certainly increase through 2009 as unemployment rises and incomes fall. Second, educational achievement is determined by a number of factors outside of the school environment. For example, health services—from pre-natal care to dental and optometric care—can eliminate barriers to educational achievement. After-school and summer educational activities also affect in-school achievement and learning. Forced housing dislocations—and in the extreme, homelessness—impact educational outcomes as well. All of these influences on educational success are clearly shaped by economic downturns.

The number of people without health insurance in 2008 was 46.3 million, with over 7 million kids under the age of 18 uninsured (U.S. Census 2009). With poverty (over 14 million kids in 2008) and foreclosures (4.3% of mortgage loans in the foreclosure process1) also on the rise, we can expect even more children will struggle with their education. Finally, families struggling to get by are often forced to delay or abandon plans for continuing education. A recent survey of young adults found that 20% aged 18-29 have left or delayed college (Greenberg and Keating 2009). A survey conducted in Colorado found that a quarter of parents with children in two-year colleges had planned on sending their kids to four-year institutions before the recession (CollegeInvest 2009). This delay or reduction in college attendance is costly. Not only does college attendance yield higher earnings, lower unemployment, and other benefits to the individual, but it also conveys myriad social benefits as well, including better health outcomes, lower incarceration rates, greater volunteerism rates, etc.

(see, e.g., Baum and Pa-yea (2005) or Acemoglu and Angrist (2000)). It is also important to note that the increased educational struggles for many kids and young adults will have lasting effects. Not only does increased educational success lead to higher wages and incomes for individuals and their families down the road (Card 1999), but it also leads to a greater likelihood of educational achievement for their offspring (Hertz et al. 2007; Fox et al. 2005). Figure A shows how higher-income parents are more likely to have children who complete college, and Figure B shows the high degree of correlation between parents and children in educational attainment both in the United States and abroad. As such, the economic downturn will have an impact lasting not just for years, but for generations. Opportunity There can be no doubt that recessions and high levels of unemployment lead to reduced economic opportunity for individuals and families. Job loss, reductions in incomes, and increases in poverty all result in losses to individuals and the broader economy.

To take just one example of lost opportunity, recent research has found that college graduates entering into the workforce during a recession will earn less than those entering in non-recessionary environments. Surprisingly, the findings also suggest that the income loss is not temporary: lifetime earnings and occupational paths are affected as well. According to Kahn (2009) “taken as a whole, the results suggest that the labor market consequences of graduating from college in a bad economy are large, negative, and persistent.” She finds an initial wage loss of 6% to 7% for each 1 percentage-point increase in the unemployment rate, and even after 15 years, the wage loss is still 2.5%. Non-college graduates are likely to fare worse. While unemployment in the most recent recession has increased for all groups, those with less education and those with lower incomes face much higher rates than others. Job loss In the current recession, the unemployment rate has increased from 4.9% in December 2007 to 9.7% in August this year.

There are currently about 15 million people who are unemployed—twice the number as at the start of the recession—with roughly 1 in 6 workers un- or underemployed. About 5 million workers have been unemployed for more than six months, and these long-term unemployed are the highest percentage of the total since 1948. Loosing one’s job obviously creates problems for most individuals and families. The income loss can persist for years, even after a new job is taken (often at a lower salary). Although the literature on the impact of job loss is too extensive to detail here, it is worth noting the evidence presented by Farber (2005).

Using results from the Displaced Workers Survey through 2003, Farber finds that a job separation is costly:2 “In the most recent period (2001-03), about 35% of job losers are not employed at the subsequent survey date; about 13% re-employed full-time job losers are holding part-time jobs; full-time job losers who find new full-time jobs earn about 13% less on average on their new jobs than on the lost job…” The impact of job loss goes well beyond income and earnings, and can impact one’s mental health (see Murphy and Athanasou (1999) for a review of 16 prior studies). It is also important to note that how one fares in a recession depends on a variety of factors. For example, older workers tend to be over-represented among the long-term unemployed when compared with other age groups. Poverty and wealth Simply put, poverty is not good for the economy. When children grow up in poverty, they are more likely, later in life, to have low earnings, commit crimes, and have poor health. Holtzer et al.

(2007) estimate the cumulative costs to the economy of childhood poverty to be about $500 billion per year, or about 4% of GDP. There is significant evidence that poverty has lasting consequences for kids, including educational achievement, cognitive development, and emotional and behavioral outcomes.3 As noted above, family income can be expected to impact educational attainment in various ways, but falling incomes and higher poverty levels also impact adults’ opportunities as well. Wealth also shapes economic opportunities, providing a lifeline when times are tough (such as a recession) and can finance additional education, retraining, or the startup costs of a new business. Unfortunately, a large share of the country has little in the way of wealth: in 2004 approximately 30% of households had a net worth of less than $12,000 (Mishel et al. 2009). This problem is even more severe for certain populations: the median financial wealth for blacks—which includes liquid and semi-liquid assets such as mutual funds, trusts, and bank account holdings—was just $300 in 2004.

Economic mobility As noted above, inter-generational mobility—or the lack thereof—can lead to persistent impacts of recessions. Poorer families can lead to less opportunity and worse economic outcomes for their children through a variety of mechanisms—be it through nutrition, educational attainment, or access to wealth. A recession, therefore, should not be thought as a one-time event that stresses individuals and families for a couple of years. Rather, economic downturns will impact the future prospects of all family members, including children, and will have consequences for years to come. A range of findings suggest that economic outcomes— especially one’s position in the income and wealth distribution—are often carried over from one to the next (Solon 1992; Hertz 2006). More directly related to job loss, Oreopoulos et al. (2005) looks at labor market earnings of children whose fathers experienced a job loss. Not only did the job loss lead to a persistent loss in family income, but the next generation also had earnings 9% lower than similar children whose father did not experience unemployment. Private investment Perhaps the most obvious areas in which recessions can slow economic growth is in those of investments and R&D.

Economists have long recognized the central role of investment and technology as key contributors to economic growth.4 Recessions can and do lead to decreases in investment spending and the adoption of new technologies. This is a result of at least four factors. First, an economic downturn will lead to a drop in demand for firms’ products as customers’ incomes decline, thus lowering the return to investments. Second, limited access to credit will limit firms’ ability to invest. Third, recessions are periods of increased uncertainty that may lead firms to retrench toward “core” products and production techniques, and therefore they may be less likely to experiment with new products and techniques. Finally, we must also consider the interaction between human and physical capital. Technology is often embedded in new physical equipment: as production and employment is reduced, there is less purchasing of newer equipment. As a result, workers are less able to utilize their skills, and there is less need to “up-skill” current employees or hire additional employees with new skills.5 Figure C shows the growth of non-residential investment in each of the last four recessions, as well as a more narrow category of equipment and software (thus excluding structures).

Over the 1947-2009 period, annualized quarterly non-residential investment has averaged 4.7%, while investment in equipment and software have averaged 5.9%. As the figure shows, investment contracts significantly during recessions. It also shows the severity of the current downturn, with total non-residential investment down by 20% from peak levels through the second quarter of 2009. To illustrate with a concrete example the impact in one particular area, consider the deployment of broadband access. There is evidence that universal access to broadband internet connectivity could yield significant economic benefits (see Crandall and Jackson (2001) or Atkinson et al. (2009)). Yet investments in information processing equipment/software and computers/peripheral equipment are down from peak levels by 11% and 15%, respectively. The consequences of the lower levels of investment are obvious. Less capital investment today means lower levels of economic production in the future. Lower levels of physical investment can also mean lower levels of productivity and hence wages.6 The impact will last well beyond the official end of the current recession.

Entrepreneurial activity: Business formation and expansion Aside from the general downturn in investment activity, recessions—and particularly ones that involve a credit crunch as the current one does—can hamper small business formation and entrepreneurial activity. From a long-run perspective, new business formation is important because of the links between innovation, R&D, and new start-ups. New businesses are often formed to develop, implement, and market new technologies. To take one example, Kirchhoff et al. (2002) examines the link between university-based R&D activity and new business creation and finds that “university R&D expenditures are significantly related to new firm formations in the same [Local Market Area].” Thus delays in new business formation may mean delays in the development and adoption of new technologies, causing long-run damage to the economy.7 There are several ways recessions can slow business formation and expansion. First, to state the obvious, new businesses need new customers. An economic slowdown means that there is less spending overall; therefore, people looking to start a new business may decide to delay ventures until demand returns to normal levels. Second, new businesses need new investors and creditors.

Lower incomes and wealth levels may mean that new business will find it more difficult to find individual investors, and credit constraints may limit borrowing from private banks. According to a recent report by the U.S. Small Business Administration (SBA 2009): “The credit freeze in the short-term funding market had a devastating effect on the economy and small firms. By late 2008, the normal production of goods and services had virtually stalled.” A survey of loan officers also suggests that standards for small-firm commercial and industrial loans were significantly tightened. Not only do recessions make it more difficult to start a new business, they also can undermine new start-ups that are struggling to get by. There may be many new businesses (and business mod els) that would be successful in ordinary times but are unable to succeed due to a lack of demand or credit. In 2008, 43,500 businesses filed for bankruptcy, up from 28,300 businesses in 2007 and more than double the 19,700 filings in 2006 (SBA 2009). The recession’s impact can also be seen in initial public offering (IPO) activity.

Firms use capital raised from IPOs to expand activities. In 2008, there were just 21 IPOs for operating companies, down from an annual average of 163 in the four years prior (Ritter 2009).8 Furthermore, the median age of IPOs in 2008 was slightly higher than in past years, meaning that it is the more-established firms that are receiving the capital influx. It is tempting to conclude that recessions merely delay new business formation, and that over time delayed plans will eventually be implemented. However, for many new businesses, there is a limited opportunity to get going. Furthermore, innovative new firms often build on prior innovation and technology platforms. A delay in one business may mean many others will be delayed as well, creating a ripple effect across a broader range of businesses. Time path of investment— short-run impacts and costs To better understand the impact of economic stimulus on the overall economy and on the federal government’s finances, consider a hypothetical one-year, $100 billion package of federal spending on public investments starting at the beginning of 2009.

Figure D shows the impact of this spending, assuming it is spread evenly throughout the year ($25 billion per calendar quarter). Using estimates of the macroeconomic impact of a spending surge,9 the figure also shows how GDP responds to this increase in spending. The economic impact will be larger than the initial impulse—federal dollars will increase private incomes, raise public consumption, and stimulate even more production, resulting in what’s known as the “multiplier effect.” The impact also lasts beyond the one-year window as the increased economic production ripples through the economy. Beyond the short- and medium-run boost to GDP, the spending increase will have impacts on the federal budget. In particular, the boost to economic activity (relative to a no-stimulus scenario) will lead to a boost in federal revenues as individual and business incomes increase. However, if the spending is deficit financed— thus resulting in an increase to the national debt—the federal government would see additional interest costs over time.

Figure E shows the relative magnitude of these two impacts (assuming a constant interest rate).10 While the revenue impact is temporary, the higher interest costs, however, will continue.11 Over the next 10 years, federal revenue would increase by a cumulative $25 billion over baseline, offsetting a portion of the cost of the stimulus. The extra interest expenses (after factoring in the revenue boost) would total $18 billion over the next decade. Looking over longer horizons would, of course, increase this net cost. On a present discounted basis projecting into the indefinite future, the net increase in interest payments would be about $92 billion—smaller than the “headline” $100 billion cost. Over time, as the economy grows, the additional interest payments will fall relative to the economy’s size: in this example, additional annual interest costs would fall to just 0.01% of GDP after 10 years. The benefit to the overall economy over this time, however, would be approximately $154 billion in present value terms (see Figure F), which is significantly larger than the $18 billion boost in interest costs over the decade.

In short, the real economic cost to the federal government of the stimulus is less than the $100 billion in expenditures because the higher tax receipts from greater economic activity offset some of the cost. These costs can also be spread out over a number of years, and can be repaid at a time when the economy has higher output and is thus better able to afford the interest payments. At the same time, the immediate impact of the stimulus to the broader economy is substantially greater than both the overall cost as well as the additional interest payments that would be required to finance the spending boost. A similar analysis of the impact of the American Recovery and Reinvestment Act shows the benefits to GDP relative to the fiscal cost. The present value of the boost to GDP is over $1 trillion over the next decade, while the present value of the interest payments is $183 billion—nearly a 6-to-1 return on the investment over this horizon. Over the infinite horizon, the return is still a substantial 1.4-to-1.12 It is important to note that this analysis is based on fairly conventional economic models that are designed to analyze short-term dynamics.

In particular, the model assumes that there will be little to no long-term impact of investments on economic output—either in terms of total activity or the growth over time. However, as noted above, there are many reasons to believe that a short-term recession can indeed have a lasting, near-permanent impact on economic production, and thus a temporary boost can have a very long-lived impact on GDP. Conclusion Recessions can and do have lasting impact. As such, we should consider the costs of fighting recessions as long-term investments. In a globally competitive environment, the loss of investment, R&D, education, and skills more generally are even more important as they can undercut the United States’ global competitive advantages. In a global context, righting the ship as quickly and completely as possible is essential in limiting the long-term damage. The American Recovery and Reinvestment Act has and will add to the fiscal deficit, but those costs—in terms of added interest payments—should be viewed as necessary to provide a short-term boost that allows us to avoid even greater long-term damage to families and to the economy.

Appendix: Recovery and Reinvestment Act Figure A1 shows the stimulative impulse of the American Recovery and Reinvestment Act (ARRA) as measured by the outlay estimates of the spending proposals and the revenue estimates of the tax proposals, as estimated by the Congressional Budget Office.13 The outlays and tax reductions are expected to begin quickly and then peak in 2010, with smaller impacts in the out-years. The figure also shows the impact of these policies on GDP assuming the same multiplier effect on the overall economy as described above. As with the example above, the stimulus leads to substantial increases in GDP, thus creating revenues that partially offset the overall cost of the package. The interest costs to the federal government increase over time due to the additional debt created, and also due to expected increases in the interest rate. However, the additional interest costs level off to about 0.14% of GDP by the middle of the next decade (see Figure A2). Again, since the costs are spread into the future and the benefits to the economy are immediate, the 10-year benefits substantially outweigh the interest costs (see Figure A3).

The present value of the boost to GDP is over $1 trillion over the next decade, while the present value of the interest payments is $183 billion—nearly a 6-to-1 return on the investment. Over the infinite horizon, the return is still 1.4-to-1. Endnotes Economic downturn financial definition of Economic downturn Economic downturn financial definition of Economic downturn Related to Economic downturn: economic crisis Recession A temporary downturn in economic activity, usually indicated by two consecutive quarters of a falling GDP . The official NBER definition of recession (which is used to date U.S. recessions) is: A recession is 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. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades. The start and end dates are determined by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER).

It is a popular misconception that a recession is indicated simply by two consecutive quarters of declining GDP, which is true for most, but not all recession. NBER uses monthly data to date the start and ending months of recessions. Recession A prolonged economic retraction. While there is no technical definition of a recession, they are conventionally defined by two or more consecutive quarters of negative GDP growth . Recessions are marked by declines in productivity and investment and high unemployment. See also: Depression . recession An extended decline in general business activity. The National Bureau of Economic Research formally defines a recession as three consecutive quarters of falling real gross domestic product. A recession affects different securities in different ways. For example, holders of high-quality bonds stand to benefit because inflation and interest rates may decline. Conversely, stockholders of manufacturing firms will probably see company profits and dividends drop. Case Study After nearly a year of falling commodity prices, rising unemployment, increasing personal and corporate bankruptcies, falling stock prices, and declining public confidence, the National Bureau of Economic Research made it official and on November 26, 2001, declared a recession.

The announcement wasn't a surprise to hundreds of thousands of people who had lost their jobs and an even greater number of investors who had experienced substantial losses in the stock market. The bureau's Business Cycle Dating Committee of six academic economists determined the recession commenced in March 2001, when economic activity stopped growing. Although many economists use declines in gross domestic product to define a recession, the NBER Dating Committee examined employment, industrial production, manufacturing and trade sales, and personal income. The country's last previous recession lasted eight months and ended in March 1991. The subsequent ten-year period of uninterrupted growth between March 1991 and March 2001 was the longest in America's history. Recession. Broadly defined, a recession is a downturn in a nation's economic activity. The consequences typically include increased unemployment, decreased consumer and business spending, and declining stock prices. Recessions are typically shorter than the periods of economic expansion that they follow, but they can be quite severe even if brief. Recovery is slower from some recessions than from others.

The National Bureau of Economic Research (NBER), which tracks recessions, describes the low point of a recession as a trough between two peaks, the points at which a recession began and ended -- all three of which can be identified only in retrospect. The Conference Board, a business research group, considers three consecutive monthly drops in its Index of Leading Economic Indicators a sign of decline and potential recession up to 18 months in the future. The Board's record in predicting recessions is uneven, having correctly anticipated some but expected others that never materialized. recession What is Economic Recession? - Definition, Causes & Effects - Video & Lesson Transcript | Study.com What is Economic Recession? - Definition, Causes & Effects Watch short & fun videos Start Your Free Trial Today An error occurred trying to load this video. Try refreshing the page, or contact customer support. You must create an account to continue watching Register for a free trial Are you a student or a teacher? I am a student Start Your Free Trial To Continue Watching As a member, you'll also get unlimited access to over lessons in math, English, science, history, and more. Plus, get practice tests, quizzes, and personalized coaching to help you succeed.

Coming up next: Surplus in Economics: Definition & Overview You're on a roll. Keep up the good work! Your next lesson will play in 10 seconds 0:00 Economic Recession Definition 0:25 Factors That Cause Recessions 1:15 Recessions & Gross… 1:45 The Great Recession of… 2:35 Effects of a Recession 3:25 Lesson Summary Add to Add to Add to Want to watch this again later? Log in or sign up to add this lesson to a Custom Course. Custom Courses are courses that you create from Study.com lessons. Use them just like other courses to track progress, access quizzes and exams, and share content. Teachers Organize and share selected lessons with your class. Make planning easier by creating your own custom course. Students Create a new course from any lesson page or your dashboard. From any lesson page: Click "Add to" located below the video player and follow the prompts to name your course and save your lesson. From your dashboard: Click on the "Custom Courses" tab, then click "Create course". Next, go to any lesson page and begin adding lessons. Edit your Custom Course directly from your dashboard.

Personalize: Name your Custom Course and add an optional description or learning objective. Organize: Create chapters to group lesson within your course. Remove and reorder chapters and lessons at any time. Share your Custom Course or assign lessons and chapters. Teacher Edition: Share or assign lessons and chapters by clicking the "Teacher" tab on the lesson or chapter page you want to assign. Students' quiz scores and video views will be trackable in your "Teacher" tab. Premium Edition: You can share your Custom Course by copying and pasting the course URL. Only Study.com members will be able to access the entire course. Create an account to start this course today Try it free for 5 days! Lesson Transcript Instructor: Paul Mckinney Paul has been in higher education for 17 years. He has a master's degree and is earning his PhD in Community College Leadership. A recession is a general downturn in any economy. A recession is associated with high unemployment, slowing gross domestic product, and high inflation. Economic Recession Definition Economic recession is a period of general economic decline and is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. Generally, a recession is less severe than a depression.

The blame for a recession generally falls on the federal leadership, often either the president himself, the head of the Federal Reserve, or the entire administration. Factors that Cause Recessions High interest rates are a cause of recession because they limit liquidity, or the amount of money available to invest. Another factor is increased inflation. Inflation refers to a general rise in the prices of goods and services over a period of time. As inflation increases, the percentage of goods and services that can be purchased with the same amount of money decreases. Reduced consumer confidence is another factor that can cause a recession. If consumers believe the economy is bad, they are less likely to spend money. Consumer confidence is psychological but can have a real impact on any economy. Reduced real wages, another factor, refers to wages that have been adjusted for inflation. Falling real wages means that a worker's paycheck is not keeping up with inflation. The worker might be making the same amount of money, but his purchasing power has been reduced. Recessions and Gross Domestic Product An economic recession is typically defined as a decline in gross domestic product (GDP) for two or more consecutive quarters. GDP is the market value of all goods and services produced within a country in a given period of time.

An example of one type of GDP would be the value of all the automobiles produced within the United States for one year. GDP only takes into account new products that have been manufactured. Therefore, if a pre-owned car lot were selling pre-owned cars, they would not be included in the GDP calculation. The Great Recession of 2007-2008 Poor and irrational lending policies from the financial industry led many people to buy houses they could not afford because everyone thought housing prices would continue to rise. In 2006, the bubble burst as housing prices started to decline. An escalating foreclosure rate caused panic, many banks and hedge funds who had bought mortgage-backed securities on the secondary market suddenly realized they were facing huge loses. By August 2007, banks became afraid to lend to each other because they did not want these toxic loans as collateral. This led to the $700 billion bailout from the government to help save several large financial institutions from bankruptcy. By December 2008, employment was declining faster than in the 2001 recession, and the United States fell into a deep recession. ×

Question: What is the term for an economic downturn that is more severe than a recession?
Answer: Depression