updated 10/10/2008 6:31:50 PM ET 2008-10-10T22:31:50

Stocks are falling, unemployment is rising and even banks seem to be hiding their money under mattresses. It's hard to measure how bad things are and impossible to say whether they'll get worse. With commentators throwing around words usually reserved for the worst of economic times — crash, recession, depression — the one question we can answer is what those words mean.

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The economy expands and shrinks in cycles, with times of growth followed by times of contraction.

In an expansion, the economy grows. Manufacturers build new factories, retailers open more stores and, most of the time, companies hire additional workers. The 1990s was a decade of growth, the longest peacetime economic expansion in U.S. history.

In a recession, the economy shrinks for months. Factories produce less, cutting shifts or laying off workers. Incomes fall. Sales drop. The last recession lasted nine months, ending in November 2001.

Under one classic definition, a recession occurs when the economy declines for two straight quarters. The National Bureau of Economic Research, the recognized arbiter for dating recessions, uses a more complex formula that includes factors such as employment and income growth. It defines a recession as "a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade."

A depression is a more severe downturn that persists for years. In a depression, prices often fall as unemployment rises. Shoppers drastically cut spending. The Great Depression began in 1929 and lasted till 1941, when the United States' entry into World War II began reviving the economy. During the Depression, unemployment peaked at nearly 25 percent. Many of those who did work found only part-time jobs. By contrast, the current unemployment rate is 6.1 percent.

Recent talk about depressions has been sparked by worsening economic data and the frightening drop in stock prices. The plunge in stock prices has been almost as steep as the crash on three days in late October 1929 that began the Great Depression. Most professional investors call a decline of at least 20 percent within a few days a crash.

A 20 percent decline over a longer period is called a bear market. A bear market is an extended fall in prices for stocks, bonds, commodities, or all three. While there's debate about whether the decline of the eight trading days ending Friday amounts to a crash, there's no argument that we are in a bear market. The Standard & Poor's 500 index is nearly 42 percent lower than it was at its highest point last October.

The opposite of a bear market is a bull market, which brings a sustained increase in the prices of stocks, bonds or commodities. Market historians may point to Oct. 9, 2007, as the crest of the most recent bull market — with the S&P 500 surging 101.5 percent over five years — as the start of a bear market of undetermined length.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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