Recession? Depression? Deflation? The ABC's of the Economic Downturn

News of the economy is inescapable these days and most of it is bad news. The economy dominates the headlines, the evening news and our daily conversations. Sorting out what all the terms mean and what they have to do with your individual bottom line can be difficult. Here is a quick rundown of some of those ubiquitous economic terms:

Recession - The National Bureau of Economic Research (NBER) defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales." In other words, a recession is when the economy slows down significantly in many areas for at least half a year. It seems there are few economists who agree on the exact definition and exactly which areas of the economy give the truest indications. This explains why there is endless speculation in the media as to whether we are "officially" in a recession. While it is difficult to pinpoint exactly when a recession begins, the collective wisdom of hindsight shows they generally last about a year. It is now widely believed that we are in a global recession.

Lagging indicators - This refers to all those terms that are bandied about in economic discussions. While many of them--like the unemployment rate or labor costs--are easily understood, others are a little less clear. For example, what is the prime rate? This refers to the Prime Lending Rate, or the interest rate used by banks.
What is the consumer price index? While the Department of Labor keeps numerous indexes on a variety of price factors, the CPI specifically refers to the change in prices for good and services.

Depression - There have been many comparisons of this economic downturn being similar to the Great Depression of the 1930's. A depression is defined as sustained recession. Or as the old joke goes: A recession is when the guy next door loses his job. A depression is when you lose your job.

Inflation - This all has to do with how much things cost relative to the value of the dollar. As prices of goods and services go up, the spending power of the dollar doesn't go as far. In the spring when gas and grocery prices were so high, there was a lot of talk about inflation.

Deflation - Now all the talk is about deflation, or the decline in prices caused by a decline in the demand for products or services. This comes about as people hold onto their money and spend less, a side effect of high unemployment, low consumer confidence and general unease about the economy.

FDIC - This refers to the Federal Deposit Insurance Corporation, which means the government insures up to $100,000 of your money at banks and savings associations. As banks fail around the country due to bad debt exceeding assets, the FDIC is one of the factors that keeps this economic crisis from turning into another Great Depression.

Economic stimulus - Earlier this year, President Bush gave Americans extra money with their tax returns in the hope that this would stimulate spending in the economy. The idea is that if people are out there spending money then people are keeping their jobs making, transporting and selling goods. Unfortunately, it doesn't always work that way.

President-elect Barack Obama began outlining his own ideas for economic stimulus this weekend with a two-year plan of creating 2.5 million jobs.

The New Deal - Obama's plan, even during the campaign, is often compared to the Franklin D. Roosevelt's economic programs in the 1930's. This series of initiatives, including banking reform laws, public works and agricultural programs and the creation of the federal welfare state were created to get the country past the Great Depression.

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