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Recession or Depression?

Posted on 7/15/2008

What's the difference between a recession and a depression?
Which one are we in now? Is it possible that the other will happen?
Thanks, Carrie

Perhaps an article on the definition of a recession would be helpful. Love the Stretcher, but you seem to accept that we are in a recession. Not by the numbers - not yet, at least. We are experiencing inflation. But maybe not a recession. Time will tell. Just makes a great website and newsletter look less than stellar when you buy in to the conventional wisdom instead of stating facts...
Jennifer

Carrie & Jennifer,

Let's start with the facts. A recession is when the economy shrinks for 2 consecutive quarters.A depression is when the economy shrinks by more than 10%.

So far we have not even had 1 quarter where the economy has shrunk. So we're not in either a recession or a depression.

It's possible (likely?) that we'll go into a recession. We haven't had even 1 quarter of economic decline since Q3 2001 (9/11) and no recession since before 2000. So it's remarkable that we haven't had one before now. Based on past economic cycles we are long, long overdue.

As to forecasting the future? That's something that I really don't think I can do.

Do I buy the 'conventional wisdom' that we're already in a recession? No, I really don't. I think that the media will always promote a potential crisis. It helps them to keep readers/viewers and to make money. You'll never see a big headline saying "Everything Is OK". That doesn't sell newspapers or keep TV watchers from reaching for the remote. In fact, I get bugged when they hype a recession that doesn't exist. Frankly, they've got a lot of people scared who don't need to be.

But just because we're not officially in a recession, that doesn't mean that we shouldn't discuss being prepared for hard times. Even when times are good. Just like the Boy Scouts we believe in being prepared. For a job loss, unexpected illness or other unexpected expense. That's just being smart in my book. We've been encouraging people to save for a rainy day since we started in '96. I've been telling individuals the same thing back when I was a financial planner for the last 25 years. It's always been good advice.

Does that make us look like we're going along with the 'conventional wisdom'? Perhaps. But, that's really not the motivation.

It's important for us to remember that not everyone is in the same place in life. Some of our readers are doing just fine. Sure, they're not happy about higher gasoline or bread prices. But, paying for them won't break their budget.

That's not true for everyone. Some folks are really struggling with the higher gas prices. They can hardly afford to drive to work. Others may have lost a job or faced a sudden illness. For them it doesn't matter whether the economy is in a recession. Their family is in a recession. And, that's all that matters to them.

It's our job to try to provide tools for those who need them and are willing to use them. That means that we'll probably always pay a little more attention to the black cloud instead of looking at the silver lining. Personally I tend to be an optimist. But I think that being prepared for the worst actually gives you more freedom to be optimistic about the future. Instead of worrying about it, you know that you've taken appropriate steps.

That really would make a good motto. "Expect the best, prepare for the worst." (I googled it and find that it's attributable to Zig Ziglar - it does sound like something that he'd say). But, it's good advice. Especially for those of us who want to be in control of our financial futures.

Keep on Stretching those Dollars!

Gary

The author, Gary Foreman, is a former Certified Financial Planner who currently edits The Dollar Stretcher web site and newsletter.
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