Recession vs. Depression

Understanding how recession vs. depression is crucial to gaining a realistic perspective on current economic circumstances.

Having the right information can make you feel more secure about your financial future.

Recession vs. Depression: What's the Difference?

Although people often use the terms recession and depression interchangeably in casual conversation, the two are not the same.

Defining the Terms

Changes in the Gross National Product (GNP) are one way to determine the difference between recession vs. depression. To be a depression, the GNP must decline by more than 10 percent. A recession is a less severe downturn, often defined as two consecutive quarters of economic contraction.

The Great Depression

The Great Depression was period of severe economic downturn that began with the Black Tuesday stock market crash on October 29, 1929 and lasted throughout most of the 1930s. During this time, the GNP dropped more than 30 percent. At its peak in 1933, unemployment topped 25 percent and wages plummeted over 40 percent for those who were lucky enough to still have jobs.

Farmers were hit especially hard by the Great Depression. Many families lost their farms after years of erosion followed by a drought created a "Dust Bowl" that prevented crops from growing. A number of the displaced farmers ended up homeless or living in shantytowns nicknamed "Hoovervilles" in reference to then-President Herbert Hoover.

Following Recessions

Since the Great Depression ended, the United States has experienced recessions several times. Recessions have occurred in 1953, 1957, 1960, 1973, 1980, 1990, and 2001. The collapse of the housing market and severe credit restrictions are major contributing factors to the current economic recession, which has a beginning date of sometime between 2007 and 2008.

Predicting the beginning of a recession is often difficult. While a major event such as the 9-11 terrorist attacks in 2001 can set off the beginning of a recession, sometimes a recession has many different contributing factors. This is why you sometimes see conflicting reports about the date a recession actually began.

The biggest risk that comes with recessions is that they will turn into depressions if not properly managed. This fear is a large part of the reason why the U.S. government is agreeing to a "bailout" of the major banks for the current economic recession. Even though the cost of the action is substantial, the damage that could result from doing nothing carries greater consequences.

Additional Information

To learn more about the difference between recessions and depressions, LoveToKnow Save suggests visiting the following helpful links:

• The Great Depression
• What's the Difference between a Recession and a Depression?
• Are We in a Recession or a Depression?
• Recession.org

Nothing Lasts Forever

The key thing to remember when discussing recession vs. depression is that the markets are amazingly fluid and resistant. Downturns, while not fun to live through, are in many ways a natural part of the financial cycle. In fact, many economists state that one of the benefits of economic recession is that it plays an important role in increasing productivity and efficiency within businesses.

Protecting Your Financial Future

Regardless of whether the country is experiencing a recession or depression, there are a number of simple steps you can take to help safeguard your own financial future. For example:

• Don't spend more than you earn. Avoid using credit cards to live beyond your means.
• Work on becoming more self-sufficient by mastering basic cooking, sewing, plumbing, carpentry, and auto repair skills.
• Take a close look at your household budget to see what expenses could be reduced or eliminated. The LoveToKnow Save article on 1930s Frugality provides an interesting look at how many of the modern conveniences we take for granted are not truly necessary for a happy life.
• Be frugal when celebrating birthdays, holidays, and other special occasions. Avoid overindulging your children and try making handmade gifts whenever possible.
• Consider starting a part-time work-at-home business or taking on freelance assignments to generate an extra source of income if you're worried about the security of your day job.

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