Recession vs depression: Differences between the economic downturns

Gross domestic product (GDP) contracts for at least a few months in a recession. GDP growth will slow for several quarters before it turns negative in a typical recession. “The bottom line is there’s not really a concrete definition. Not only for depression, but even for a recession,” said Gary Schlossberg, lead wealth investment solutions analyst at Wells Fargo. However, it’s a little tricky to concretely, quantifiably describe the difference between a recession and a depression, mainly because there’s only been one. The U.S. may be in a recession as you’re reading this — the NBER committee responsible for declaring recessions frequently makes that call in retrospect.

Economic downturns explained: What is a recession vs. a depression?

It might be harder for you to get or keep a job, negotiate a raise or start a small business in a recession. To be official, a recession has to include a downward trend in GDP characterized by a decline in production and employment, which in turn causes the incomes and spending of households to decline. These income and spending declines could lead to further declines in production and employment in a vicious cycle that morphs into a depression. Your life would change dramatically if the United States were to experience an economic downturn on the scale of the Great Depression. The stock market would drop by 50%, and it would take decades, not months, to recover. The NBER notes that economists differ on the period of time that designates a depression.

The first lasted for 43 months, from August 1929 to March 1933. Recessions have lasted for approximately 10 months on average since 1945. This increased competition for jobs can undermine employees’ power to demand adequate compensation, which can, in turn, place downward pressure on salaries and wages. Lowered incomes can significantly impact the economy in the long term, for example, undermining nutrition and making it more difficult for people to pursue a college education.

A vicious cycle, economically and psychologically

This measure fails to register several official (NBER defined) US recessions. Depressions are generated by the same factors that cause a recession. You can look at depression as an extended recession on the graph of the business cycle wave. Unemployment rises, gross domestic product (GDP) drops off, stock prices fall and the stock market crashes. A common rule of thumb for recession range trading versus trend following is two quarters of negative GDP growth. The corresponding rule of thumb for a depression is a 10 percent decline in gross domestic product (GDP).

As a result, companies reduce production or shut down manufacturing facilities, with fewer exports. That may not always be the case, because past performance doesn’t guarantee anything about the future, as the boilerplate investment disclaimer reminds us. The 2008 and 2020 comebacks were helped a great deal by the Federal Reserve’s zero interest rate policy paired with stimulus checks, tax credits, unemployment benefit extensions, and other government aid. Typically, people who completely exited stocks during a recession came to regret it. The 2008 and 2020 recession sell-offs were followed by long rallies that quickly brought major indexes back above pre-recession levels.

1. The NBER defines a recession as a period of significant economic decline that affects multiple segments of the economy and lasts more than a few months.
2. The sentiment of consumers has a substantial impact on the economy.
3. A recession can be defined as a time during which the economy shrinks, businesses make less money and the unemployment rate goes up.
4. When the economy goes into recession, many jobs will be eliminated, both in the public and private sectors.

Definition of Depression

Economic downturns can lower residents’ income by eliminating jobs and lowering wages. In addition, companies reduce investment in capital equipment during recessions, which lowers productivity. When the economy slows down, businesses look for places to cut back, and so recessions are typically accompanied by an uptick in unemployment.

What is a recession? Definition, Causes, and Impacts

When people start feeling the pinch of a worsening economy, they often pull back on spending. One of the first data points that picks this up is monthly manufacturing data from the Institute of Supply Management (ISM), as well as regular purchasing managers index reports such as the Chicago Purchasing Managers Index (PMI). Wall Street analysts and companies project earnings per share by quarter and over the course of the coming year.

So while recessions are a normal part of the business cycle, another depression is unlikely to occur. Thanks to the measures put in place by the government, the banking system is stronger and more stable, and the economy is better equipped to weather any downturns. While recession and depression both describe periods of economic decline, these terms are not interchangeable. A depression is significantly worse than a recession and much rarer. The impact of a severe recession can take years to overcome. As we learned from the Great Depression, entire generations of people with the bad luck to enter the workforce during such times may never make up the lost income opportunities.

To put it into perspective, consider the differences between the Great Depression and the Great Recession, which lasted from December 2007 to June 2009. The Great Recession was the longest recession since World War II and was notably severe compared to other recessions. Any long-term investor will likely face several economic recessions over decades of investing. The way you respond, however, is in your control, especially when it comes to the emotional side of investing. You can also monitor employment trends by following the monthly jobs report and other stats put out by the Bureau of Labor Statistics. Or consider following non-government research, such as the Challenger Report (which tracks job cuts) and the ADP National Employment Report (collected by payroll processing giant ADP).

However, the difference makes itself evident when you compare the Great Recession to the Great Depression. Another example of an event that served as a shock to the economy was Hurricane Katrina. One estimate was that this natural disaster caused $200 billion worth of damage, according to figures from the U.S. You may be worried about losing your job and being able to pay your bills — or you may be alarmed at just how abruptly that little red line that represents your investment portfolio has dropped. According to the NBER, the U.S. has experienced 23 recessions since 1900; in that time, there’s only been one depression.

Generally periods labeled depressions are marked by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced given current resources and technology (potential output). A devastating breakdown of an economy (essentially, a severe depression, or hyperinflation, depending on the circumstances) is called economic collapse. A recession is a downtrend in the economy that can affect production and employment, and produce lower household income and spending. The effects of a depression are much more severe, characterized by widespread unemployment and major pauses in economic activity. Recessions can also be more localized, while depressions can have global reach. One common challenge that investors encounter during economic downturns is the impact that falling asset values can have on their net worth.

When the economy goes into recession, the value of assets held by everyday investors, for example, stocks and real estate, can decline substantially. Generally speaking, a depression lasts years rather than months and typically causes higher unemployment rates and a sharper decline in Trade silver GDP. While a recession is often limited to a single country, a depression is usually severe enough to have global impacts.

But “based on known unknowns, I would say that the risk of an outright depression is relatively small.” GDP in the U.S. fell 4.3% from peak to trough during the 2008 recession, according to a website maintained by the Federal Reserve Bank of St. Louis’s economic secured overnight financing rate research division. But that two-month slump was “so deep, and so pervasive, that the committee threw out the rulebook and said yes, this was a recession,” Schlossberg said. “So you have to be careful about using that rule of thumb.”