Recession vs Depression: How Do These Economic Terms Compare?

Recessions have lasted for approximately 10 months on average since 1945. Production, employment, consumption, trade, investment, income, spending—all of these aspects of the economy are reduced sharply and widely, often across the entire globe. A recession can be global in scale, but it can also restrict the economies of smaller regions or just even individual countries. Barring any major unseen circumstances, a recession that impacts the economy so deeply that it’s widely considered a depression is unlikely. However, the turbulence that rising inflation and soaring interest rates have stirred up also carry whispers of an upcoming recession. The programs and reforms put in place in response to the Great Depression were established in hopes that an economic downturn of parallel magnitude would unlikely be repeated.

Because economic depressions are less common than recessions, the word depression, in our everyday lives, probably refers to the word’s psychological senses. If you believe in the power of capitalism, human ingenuity, and the ability of central banks to smooth out economic extremes, it’s hard to justify throwing up your hands and giving in when recession takes the market lower. Instead, consider your asset allocations and which sectors you have exposure to. Certain sectors tend to perform better than others during recessions, and bonds and other fixed-income securities can sometimes be a line of defense. In contrast, it took the market decades to recover from the 1929 crash.

Graphs that depict market decline usually come about after a recession has already made its presence known in the markets. 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. The COVID-19 pandemic caused a recession, but not a depression. Unlike the early years of the Great Depression, Congress used expansionary fiscal policy to assist Americans.

  1. Although decades-long recessions aren’t likely today, rebounds might not occur as quickly as they did in 2008 or 2020 if the Fed doesn’t respond by quickly cutting rates.
  2. «We’re in a situation where it’s going to look like it predicted it again, but the economic crisis we’re in right now is from a totally different place,» Ullrich says.
  3. When there’s less money to go around, consumers spend less.
  4. «I wouldn’t necessarily give much credence to the fact that the inverted yield curve last year predicted what’s happening right now.»
  5. Yet, the economy took a tumble as a result of the pandemic.

Khalfani-Cox says that a depression is also “marked by a lack of investments by individuals and institutions.” She adds that many people stop buying assets, such as stocks and houses. Recessions and depressions are similar in that they both signal a downturn in the economy. But depressions are far less common and indicate a more severe, widespread impact. Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page.

What is a double-dip recession?

And, according to the International Monetary Fund (IMF), 21 advanced economies around the world experienced 122 recessions between 1960–2007. In contrast, we generally only refer to one depression—the Great Depression. Between 1929 and 1939, President Franklin D. Roosevelt passed numerous pieces of legislation aimed at stabilizing the economy. He established the coinbase lists unmasking of bitcoins creator among business risks FDIC to protect consumers’ bank accounts. The SEC was created to regulate the stock market, and the Social Security Act guaranteed pensions to Americans and set up an unemployment insurance program. While you’ve probably heard the terms «recession» and «depression» before, you may not know what they actually mean and what the difference is between the two.

Learn more about causes and effects of the Great Depression in our Homework Help on this important term.

Stocks are a piece of ownership in a company, so the stock market is a vote of confidence in the future of these companies. Social recessions can take a toll on our physical and mental health, and can weaken our social bonds and communities. Loneliness and isolation are some symptoms of a social recession, which can particularly harm people who are already alone. That confusion isn’t only because a word like recession is often used in contrast to a word like depression. It’s also because there aren’t any hard-and-fast, across-the-board, one-size-fits-all rules about when an economic tailspin becomes a recession—or worse.

Great Recession vs. Great Depression?

(Yes, recession and procession share a root. ) During a ceremonial recession, a special song, called recessional, is often played to mark the celebratory end of an event. The word recession is commonly used in the context of economics. First recorded in the mid-1600s, recession comes from the Latin recessiō, a form of the verb recēdere, “to go back, withdraw.” Recēdere is ultimately the source of the English word recede and recess. Consider the investment factor when determining a recession versus depression. During a recession, Khalfani-Cox says many people may buy less expensive houses or invest less than they had planned. But during a depression, the average person isn’t buying or investing at all.

What caused the Great Depression?

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. 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. Compared to a recession, a depression is much more severe and sustained.

And while a recession is often limited to a single country, a depression is usually severe enough to have global impacts. An economic recession is often defined as a decline of real gross domestic product (GDP) for two consecutive quarters — but it’s not that simple. Over the course of a business cycle, you might see GDP contract for a period of time, but that doesn’t necessarily mean that there’s a recession. There are many factors that can contribute to or cause a recession, including high interest rates, stock market crashes, sudden or unexpected price changes, and deflation. Your life would change dramatically if the United States were to experience an economic downturn on the scale of the Great Depression.

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). Still, that’s kind of a clinical way to think about it, and doesn’t fully embrace the profound unhappiness a recession can cause for investors, companies, and anyone who needs to put food on the table. As a result, companies reduce production or shut down manufacturing facilities, with fewer exports.

When GDP is adjusted for inflation, it means economists are examining monetary values at present, not historic, levels. Oscar Wilde, Winston Churchill, and Mark Twain did not, we regret to inform you, come up with many of the famous things they are credited with having said. An economic depression is typically understood as an extreme downturn in economic activity lasting several years, but the exact definition and specifications of a depression are less clear. The NBER’s view of recessions takes a more holistic outlook of the economy, meaning recessions are not necessarily defined by one single factor.

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