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Recession vs Depression: Definition and Differences

In response to the Great Depression, the federal government beefed up its tools to prevent recessions, which are part of the normal business cycle, from ballooning into depressions. In all, there have been 14 recessions since the Great Depression. The pandemic recession, the most recent, lasted only two months — from February 2020 to April 2020 — representing the smallest one on record. In fact, the recession ended before the NBER determined that a recession had begun.

  1. The Great Depression lasted ten years, and the depression that followed the panic of 1837 lasted six years.
  2. As a result, companies reduce production or shut down manufacturing facilities, with fewer exports.
  3. As profitability declines, so, too does the value of companies’ stocks.
  4. It happened in the fall of 2008 when several days of heavy selling set off what ultimately became a nearly 40% drop in the major stock indexes.
  5. A recession happens when the economy’s inflation-adjusted GDP has declined for two or more consecutive quarters.

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. The Great Depression was https://traderoom.info/ one of the most severe economic downturns in history lasting from 1929 to 1939. It started in America in 1929 as a recession before expanding globally, most notably in Europe.

Comments: Depression vs Recession

In other words, if the NBER says we’re in a recession or a depression, we’re probably in one. Compared to a recession, a depression is much more severe and sustained. A depression is a period during which business, employment, and stock-market values decline severely or remain at a very low level of activity. When prices are falling in the stock market, it’s called a bear market.

Depressions may sound similar to recessions but tend to be much more severe. Most importantly, they tend to last for a much longer period of time. In fact, there have been 13 recessions since World War II. For Gen-Z and even some millennials, an upcoming recession would be the first “normal” recession they’ve witnessed in their adult lives. The Great Recession and the brief recession toward the beginning of the pandemic are very much outliers.

Regardless of which one we officially reach, it’s becoming clear that low interest rates and a $1,200 check won’t be enough to fix the financial hardship that millions of Americans are experiencing today. Some of them cause deep declines in the economy and lead to widespread unemployment, while others are so mild that most regular people barely notice them. They look at many different indicators besides GDP, including gross domestic income, unemployment, manufacturing, and retail sales. All of these tend to decline significantly during recessions. There are repeated periods during which real GDP falls, the most dramatic instance being the early 1930s.

Most experts would agree we’re in recession territory when there’s a significant drop in economic activity that goes beyond a few months. Recessions and depressions both mark economic downturns, but they aren’t exactly the same. Recessions are more common and represent significant declines in economic activity.

Signs of a recession

The Federal Reserve and other central banks now have very sophisticated tools to stimulate the economy, so it is possible that we will never have a depression again. The Great Recession was really severe and had terrible consequences for people all over the world. But it wasn’t anywhere near as bad as the Great Depression. However, there is no fixed definition of a depression and no organization that is responsible for determining it.

Unemployment is a major aspect of a recession. Learn more in our article on the difference between furlough vs. layoff.

But as the NBER points out, the recovery period after a recession to return to peak economic activity can be lengthy. In general, during economic depressions, the stock market and consumer confidence fall and bankruptcies — both personal and business — skyrocket. The drop in economic activity lines up with a fall in employment and production.

All of these factors were at play before the U.S. entered the Great Depression in late 1929. In August of that year, just before the market crashed, the unemployment rate was 0.04%. Dwindling consumer demand and subsequent manufacturing slowdowns also paved the way for the Great Depression.

How Does a Recession Differ from Depression?

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.

An “earnings recession” can often turn into a real-world recession, and sometimes serves as a canary in the coal mine. Wall Street analysts and companies project earnings per share by quarter and over the course of the coming year. These estimates rise and fall based partly on economic winds, so when you see them fall steadily, it’s hardware development life cycle often a sign that all may not be well. There’s a joke in economic circles that a recession is when your neighbor loses their job, and a depression is when you lose yours. The information contained on this website should not considered an offer, solicitation of an offer or advice to buy or sell any security or investment product.

The Great Depression was the last time it happened in the U.S., and it was the most severe economic downturn in U.S. history. During a depression, economic activity may feel like it’s coming to a halt. The effects can be devastating, but the upside is that depressions are much rarer than recessions. Recessions are a normal part of the business cycle, and fortunately, they tend to be brief.

This definition is unpopular with most economists for two main reasons. First, this definition does not take into consideration changes in other variables. For example, this definition ignores any changes in the unemployment rate or consumer confidence.

Certain sectors tend to perform better than others during recessions, and bonds and other fixed-income securities can sometimes be a line of defense. There are people whose entire careers are spent tracking and detecting the presence of recessions and depressions. These people look at a whole array of economic indicators — from the Bureau of Labor Statistics’ employment reports to the National Association of Home Builders’ number of new homes being built. While there are lots of organizations dedicated to sniffing out recession, the National Bureau of Economic Research (NBER) is the group whose opinion on the matter is most widely relied upon.

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