Recession vs. Depression: How To Tell the Difference

What makes a depression so much worse than a recession?

Depression soup line
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A recession is a widespread economic decline that lasts for several months. A depression is a more severe downturn that lasts for years. There's been only one depression in U.S. history: the Great Depression. It lasted a decade.

According to the National Bureau of Economic Analysis, the Great Depression was a combination of two recessions. The first lasted for 43 months, from August 1929 to March 1933. The next lasted 13 months, from May 1937 to June 1938. The severe downturn lasted for about 10 years combined. There have been 34 recessions since 1854. Recessions have lasted for approximately 10 months on average since 1945.

Key Takeaways

  • There have been 34 recessions in the U.S. since 1854, but only one depression.
  • Recessions last for months, while a depression can last for years.
  • A recession is often the result of consumers losing confidence in the economy due to some major event, such as the coronavirus pandemic.
  • Governments have made major strides in implementing practices and measures that can ward off a depression.

Recession vs. Depression

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.

There's also a drop in four other critical economic indicators: income, employment, manufacturing, and retail sales. These reports come out monthly, so they usually signal a recession long before GDP turns negative.

A depression is longer and more destructive than a recession. It has years, not quarters, of economic contraction. GDP was negative for six out of the 10 years during the Great Depression. It shrank by a record of 12.9% in 1932. Unemployment reached nearly 25%. International trade shrank by more than two-thirds, and prices fell more than 25%.

The devastation of a depression is so great that the effects of the Great Depression lasted for decades after it ended. The stock market didn't recover until 1954.

Recession
  • A recession lasts for months

  • There have been 34 recessions in the U.S. since 1854

  • A recession is signaled by a drop in employment, retail sales, manufacturing, and income

Depression
  • A depression lasts for years

  • A depression has only occurred once in U.S. history

  • A depression's effects on the economy can last for decades

Where Are the Signs in Our Current Business Cycle?

The best way to figure out if we're in a recession or a depression is to understand where we are in the business cycle. A recession typically follows the peak of the business cycle. The peak is marked by irrational exuberance and asset bubbles.

The U.S. economy entered the contraction phase of the business cycle in early 2020 due largely to the COVID-19 pandemic. The government closed non-essential businesses and urged people to stay home to stop the spread of the virus. The economy contracted 5.1% in the first quarter. There were 23.1 million unemployed by April 2020, sending the unemployment rate to 14.7%.

Stock markets have been up, and unemployment has been down through 2021 and into 2022 despite the pandemic and rising inflation. But not all economists agree that the near-term outlook is bright. A report from the National Bureau of Economic Research (NBER) argues that the U.S. may have already entered a recession in late 2021. Many of the red-flag indicators it points to were also ignored prior to the Great Recession.

12 Signs of a Recession

There are 12 causes of a recession:

  • Loss of confidence in investment and the economy
  • High interest rates
  • A stock market crash
  • Falling housing prices and sales
  • Manufacturing orders slow down
  • Deregulation
  • Poor management
  • Wage-price controls
  • Post-war slowdowns
  • Credit crunches
  • Asset bubbles burst
  • Deflation

Consumers will stop buying and businesses will lay off workers when there's no confidence in the future. These situations create a downward spiral of unemployment, loan defaults, and bankruptcies.

A shock often triggers this type of panic reaction, such as a stock market crash, wage-price controls, the collapse of an asset bubble, or an unanticipated reaction to government action, such as deregulation or an increase in interest rates. It's business behavior at other times, such as poor management or credit crunches. It was a pandemic in 2020.

Stocks are a piece of ownership in a company, so the stock market is a vote of confidence in the future of these companies. It's also a referendum on the U.S. economy itself.

A crash can scare consumers, who then buy less, and this triggers a recession. The crash restricts financing for new businesses. The sale of stocks provides them with the funds they need to grow.

The stock market will continue to fall if confidence isn't restored. It's the start of a bear market if it drops more than 20%. This extreme loss of confidence is also enough to trigger a recession.

The Cause of the Great Depression

The Federal Reserve raised interest rates when it should have lowered them during the Great Depression. It was trying to protect the gold standard. But the world is no longer on the gold standard as of 2022. The U.S. dollar is the global currency.

The Fed did not increase the money supply to combat deflation, as it should have. Consumers put off making major purchases as they noticed that prices were falling. This further lowered demand. The Fed also ignored bank failures.

Follow the Great Depression Timeline to find out what caused the Depression, how bad it was, and what finally ended it.

The Fed learned from the Depression. It lowers interest rates at the first sign of a recession. It makes sure that banks have plenty of capital to lend.

Are We Headed Toward the Second Great Depression?

Your life would change dramatically if the United States were to experience an economic downturn on the scale of the Great Depression. One out of four people would lose their jobs. The stock market would drop by 50%, and it would take decades, not months, to recover.

The COVID-19 pandemic caused a recession, but it's unlikely to create a depression. Central banks around the world know how to prevent them. They make sure that banks have enough capital. They've lowered interest rates to zero.

Unlike the early years of the depression, Congress has used expansionary fiscal policy to cushion recessions. The CARES Act sent a $1,200 stimulus check to eligible adults earning up to $75,000. It also expanded unemployment benefits.

Frequently Asked Questions (FAQs)

Where should I put my money if a depression is likely?

There were many bank failures during the depression. This made people take their money out of the bank, known as a "run on the bank." Fortunately, you don't have to hide your money under a mattress because the Federal Deposit Insurance Corporation insures 100% of your savings, checking, and money market deposits. Your money is safe in a bank as long as you're within FDIC guidelines.

What was the worst recession?

The Financial Panic of 1873 is considered by many to have been the worst recession. It was triggered by a series of banking crises after the Civil War. At least 100 banks failed during this time.

Article Sources

  1. National Bureau of Economic Research. "U.S. Business Cycle Expansions and Contractions."

  2. The National Bureau of Economic Research. "The NBER's Business Cycle Dating Procedure: Frequently Asked Questions."

  3. Bureau of Economic Analysis. "National Income and Product Accounts Tables: Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product," Select "Modify," Select "First Year 1932," Select "Series Annual," Select "Refresh Table."

  4. Bureau of Labor Statistics. "Labor Force, Employment, and Unemployment, 1929-39: Estimating Methods," Page 2, Table 1.

  5. Office of the Historian. "Protectionism in the Interwar Period."

  6. Bureau of Labor Statistics. "Consumer Price Index Database, All Urban Consumers," Select "Top Picks," Check "U.S. City Average, All items," Retrieve Data, Select "More Formatting Options," Select "12-Month Percent Change" and "Range Between 1913 to Present," Retrieve Data.

  7. S&P Dow Jones Indices. "DJIA Daily Performance History," Download "DJIA Daily Performance History."

  8. Bureau of Economic Analysis. "Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product."

  9. U.S. Bureau of Labor Statistics. "Unemployment Rate," Select "Unemployment Rate," Retrieve Data.

  10. Federal Reserve History. "Garn-St Germain Depository Institutions Act of 1982."

  11. Federal Reserve History. "Recession of 1981–82."

  12. Federal Deposit Insurance Corporation. "The Cost of the Savings and Loan Crisis: Truth and Consequences," Page 1.

  13. Office of Investor Education and Advocacy. "Bear Market."

  14. The Federal Reserve Board. "Money, Gold, and the Great Depression."

  15. Board of Governors of the Federal Reserve System. "Federal Reserves Issues FOMC Statement."

  16. U.S. Congress. "H.R. 748 - CARES Act."

  17. Federal Deposit Insurance Corporation. "Deposit Insurance at a Glance."

  18. U.S. Department of the Treasury. "Financial Panic of 1873."