What is a Recession?

I see lots of misunderstandings in the media about what a recession and depression are.  For example, it's popular to point out that "the recession" ended in the summer of 2009 yet the use of food stamps and other forms of welfare has continued to be high, and unemployment has not returned to normal.  The reason is: a recession is defined narrowly as two or more successive quarters of declining GDP.  GDP (Gross Domestic Product) is the total of the monetary value of all goods and services produced during the period.   So if the economy is producing more goods but not hiring people to do it, GDP goes up, while employment does not. 

Here are the two rates:  The grey area is the period that the economy was technically in recession.  Bear-Stearns failed in March of 2008, right at the end of the 1st quarter. This was the real beginning of the crisis, but it didn't reach its crescendo until Lehman Brothers failed in September. Since GDP is computed quarterly, this counts as a bad quarter (J-M'08), followed by a good quarter, followed by three bad quarters.  The Federal Reserve, which provided the data for this graph, thus counts the recession as beginning Q1 '08 and ending after Q2 '09: 5 quarters.

But unemployment, which had been slowly declining during the bubble, had begun to rise as the subprime crisis began to unfold in early 2007 and didn't reach its peak until the GDP has been recovering for more than a quarter.  A trailing indicator, as it is called.  Or GDP is a leading indicator.  Unemployment has been coming down since its peak in late 2009, but slowwwly, much more slowly than GDP has returned to.  Worse yet, the jobs that people have are not as good, and so many people have been unable to find work that they have given up.  The rate on the chart is called the U3.  U6, which counts people who have given up because they can't find work, and people who are working part time because they can't find full time work, has stubbornly remained 6.5% higher than U3 since the recession.   Prior to the recession, it tended to be 4 to 4.5% higher.   Even U6 doesn't count people who have unwillingly taken early retirement, and there are a lot of these.  The people who need food stamps, social security, unemployment insurance, and all the rest, are U6+, which remains at least 6% higher than it was before the recession began.

What is a depression?  Economists have a lot of definitions, but it boils down to: they know it when they see it.  The most popular is: a particularly long and deep recession.   The recession part of the great depression lasted from October 1929 until the spring of 1933: 14 quarters.   Unemployment remained high until into 1942: 12.5 years.  Another popular definition is that there's deflation.  That certainly happened in the great depression too.  It's very possible that the only reason it didn't happen in the current situation is because of the TARP, the Stim, and the repeated episodes of Quantitative Easing provided enough inflationary pressure to prevent it.  Another candidate definition is that the economy enters a liquidity trap.  This is when interest rates are near zero and thus cannot be lowered further to stimulate demand.  This is also true of all depressions, but it's also true of the present situation.  It is why no amount of QE is able to stimulate the economy, as in more normal recessions.    Paul Krugman is fond of this definition and he calls the present situation the "Lesser Depression".