Recession vs. Depression: How To Tell the Difference

Recession vs. Depression: How To Tell the Difference

What makes a depression so much worse than a recession?

By Kimberly Amadeo   Updated on December 22, 2022

A recession is a widespread economic decline that typically lasts between two and 18 months.1 A depression is a more severe downturn that lasts for years. The most famous depression in U.S. history was 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 1945.2

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.

Signs of a Recession

There are five indicators that economists can use to determine whether or not the economy is in a recession.3

• Negative real Gross Domestic Product (GDP) for two or more quarters can indicate a recession.

• A decline in consumer's real income can indicate a recession, since consumer purchasing power will also decline.

• The strength of the manufacturing sector, and whether there is a trade surplus or deficit, helps economists determine whether the economy is self-sufficient.

• Inflation-adjusted retail and wholesale sales of products and goods can show economists whether there is a recession.

• A high unemployment rate, which would be about six percent or higher, indicates that the economy has already entered a recession.

Recession vs. Depression

Gross domestic product (GDP) contracts for at least a few months in a recession.4 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 each month, while the GDP is released quarterly, so they can signal a recession before the GDP turns negative.

A depression is longer and more destructive than a recession. The economic contraction from a depression lasts for years, not quarters. 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% in 1933, and prices dropped for four years in a row in the 1930s.567

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 1954.8

Depression

• A depression lasts for years

• A depression has only occurred once in the U.S. since 1854

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

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

Causes of a Recession

Causes of a recession include:

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.910 It's business behavior at other times, such as poor management or credit crunches.11 It was a pandemic in 2020.

https://www.thebalancemoney.com/recession-vs-depression-definition-causes-and-stats-3306048