Recession Versus Depression and How to Tell the Difference

What Makes a Depression So Much Worse than a Recession?

recession is widespread economic decline that lasts for at least six months. A depression is a more severe decline that lasts for several years. For example, a recession lasts for 18 months, while the most recent depression lasted for a decade.

There have been 33 recessions since 1854. There's only been one depression since then, the Great Depression of 1929. It was actually a combination of the recession that lasted from August 1929 to March 1933, and the one from May 1937 to June 1938. If you are wondering if we are in a depression or recession, it's probably a recession.

What Is a Recession?

recession
Current and former military job hopefuls line up to see a recruiter at the Civilian Jobs career expo August 5, 2010 in Fort Bragg, North Carolina. Military personnel and former military, along with their spouses, were eligible to come to the event and speak to recruiters from military and civilian employers alike. Photo by Chris Hondros/Getty Images

In a recession, gross domestic product contracts for at least two quarters. But that's not all. There are many more economic indicators that signal a recession. That's because GDP growth will usually slow for several quarters before it turns negative. That's in response to sluggish consumer demand

What Is a Depression?

Depression soup line
Soup lines during the depression. Photo: Hulton Archives/Getty Images

A depression is an extended recession that has years, not quarters, of economic contraction. It's more severe than a recession. Unemployment reaches 25%, housing prices plummet 30%, and prices fall 10%. The devastation of a depression is so great that the effects of the Great Depression lasted for decades after it ended.

Where Are We in the Current Business Cycle?

current business cycle
You need to always know where we are in the current business cycle. Illustration: Yenpitsu Nemoto/Getty Images

The best way to find out if we are in a recession or a depression is to understand where we are in the business cycle. The recession follows the peak of the business cycle. It's signaled by irrational exuberance and asset bubbles.

The Great Depression of 1929

unemployment by year
Unemployment reached an all-time high of 25% during the Great Depression. Photo: Interim Archive/Getty Images

A d​​epression on the scale of that in 1929 could not happen exactly the way it did before. Central banks around the world, including the U.S. Federal Reserve, are more aware of the importance of monetary policy in regulating the economy. 

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

12 Causes of Recession

Recession causes
When a economic boom bursts, it causes a recession. Photo: Katie Edwards/Getty Images

The underlying cause of any recession is a loss of business or consumer confidence. There are 12 events that trigger this panic reaction.

Without confidence in the future, consumers will stop buying and businesses will lay off workers. These situations create a downward economic spiral of unemployment, businesses failures, and bankruptcies.

How a Stock Market Crash Causes a Recession

stock-trader-upset.jpg
Barclays Capital trader Mario Picone holds his head while working on the trading floor at the New York Stock Exchange on September 9, 2011 in New York City. The Dow Jones Industrial Average fell below 11,000 to a seven month low worries that Congress won't pass U.S. president Barack Obama's $447 billion jobs plan. Photo by Justin Sullivan/Getty Images

Since stocks are a piece of ownership in a company, the stock market is basically a vote of confidence in the future of all these companies and, as such, in the U.S. economy itself. A drop of 11% in a quarter indicates a sustained loss of confidence.

If confidence is not restored, the stock market will continue to fall over a sustained period of time. A prolonged downward trend would eventually indicate the start of a bear market. This could hurt the economy more and push it further toward a recession.

During a Depression, Is My Money Safer Under the Mattress?

bank-run.jpg
James Stewart and Donna Reed in a scene from the film 'It's A Wonderful Life', 1946. It depicts a depression-era bank run on the Savings and Loan. Photo by RKO Radio Picture/Getty Images

During the Depression, there were many bank failures. 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.

The Federal Deposit Insurance Corporation insures 100% of your savings, checking, and money market deposits. As long as you are within their guidelines, your money is safe in a bank. What’s more, if it is in a bank, you may be able to earn interest and lose less to inflation

Is the United States Headed Toward the Second Great Depression?

homeless.jpg
A homeless person is viewed in Penn Station on January 28, 2014 in New York City. Photo: Getty Images

If the United States were to experience an economic downturn on the scale of the Great Depression, your life would change dramatically. But it probably won't happen. There are seven reasons why a depression won't reoccur. The main reason is that the past Depression taught the Fed how to avoid the next one.

Bear Markets and Recessions

bull-and-bear.jpg
The bull and bear are always fighting on Wall Street. Photo: Stephen Puetzer/Getty Images

Bear markets coincide with a recession. These 20% declines in stock market prices can also signal an impending recession. If the shock is bad enough, they can trigger the next one.

The History of Recessions

Unemployed worker
Paul Costiglio, a marketing and public relations professional, waits in a lobby for an interview at a foundation December 9, 2008 in New York City. Costiglio, 35, was laid off from his marketing job at The Partnership for a Drug-Free America. Photo by Chris Hondros/Getty Images

The Great Recession of 2008 was the worst recession since the Depression. The 1980 recession was almost as bad. It was caused by high interest rates needed to curb stagflation

President Richard Nixon created stagflation with his attempts to end the 1973 recession. He created inflation by ending the gold standard. He created the recession with wage and price controls.