Cash For Debt

Well, what is a recession? You sure hear the phrase “recession” a lot lately. The talking heads on the news and radio talk show hosts can’t seem to go more than about 30 seconds without that word leaking past their lips. From the treatment it gets you’ve probably gathered that a recession isn’t something you want, and you’d be right.

Weather you’re taking about the economy or your hairline, recession is something you’d rather stay away from. In the case recession is a normal part of the business cycle. Normal business is cyclical, going through periods of expansion and contraction. When the economy stops growing, BAM! You’re in a recession.

The normal definition of recession is one of those things that is confusing because, well, there isn’t a “normal definition”. It’s pretty easy to get a fist full of answers on the subject, but they can be distilled down in to basically this:

A recession is when aggregate business activity declines on a national level for two consecutive quarters.

People will argue that although recession can be defined by a two quarter reduction in real GDP, such a definition fails on a couple of points, although a recession by either definition could certainly include a drop in GDP. Some economists feel that the real GDP definition of recession ignores two other large economic indicators; employment level and aggregate income. They also point to sales in the manufacturing and retail sectors as important contributors to overall economic activity that should be reflected in any discussion of recession, and weather or not the nation is in one.

The economists that support the expanded definition feel that it gives a more accurate picture of economic growth and contraction than just looking at the real GDP. For example the GDP could be flat or slightly rising for two quarters as many Americans were experiencing layoffs and others were being shifted into low income jobs. GDP however is a measure of the aggregate dollar amount of goods and services produced. As productivity increases the total value of produced goods could actually rise as other as GDP fell. The reason for the new take on recession is that including the other economic indicators in the definition, along with GDP, helps paint a more accurate picture of recession and weather or not we’re in one.

Is a recession the same a depression? Thankfully, no. A recession is a milder economic malady, and just a normal part of the business cycle. A depression, on the other hand, is a much more cataclysmic, and fortunately rare, event. One definition of economic depression says that a depression is a reduction of the real GDP by 10%. That’s pretty bad, and it’s a good thing that the U.S. hasn’t seen such a plunge on our output since just before WWII.

There; now you know the definition for recession and why it isn’t a depression. You can start thinking about how to deal with it until the next period of unbridled economic joy.

Categories The Economy