Recession vs. Depression

What Are the Differences Between a Recession and a Depression?

Recession and depression are terms used to describe periods of economic downturn. The main difference between a recession and a depression is the severity and longevity of the downturn.

A recession is a period during which the economy contracts. The National Bureau of Economic Research (NBER), an organization that tracks the cycles of the economy, measures economic expansion or contraction by metrics such as consumer spending, unemployment rate and industrial production. To be considered a recession, the contraction must affect the whole economy and last for more than a few months.

Officially, there is no set definition of a depression as opposed to a recession. The NBER categorizes all periods of economic contraction as recessions and all periods of growth as expansions.

Most economists would describe a depression as essentially a particularly severe recession. During most recessions, the economy contracts by between 1% and 10%. When the decline exceeds 10%, many analysts consider the downturn a depression.

Depressions tend to last longer than recessions and have more drastic effects. An economic depression can last for several years and send a country into financial turmoil. During a depression, unemployment rises steeply while wages and consumer spending falls dramatically.

In recent decades, economic downturns have generally become less frequent and less severe. The last major economic contraction that could be regarded as a depression occurred in the 1930s.

The Great Depression

The economic contraction now known as the “Great Depression” began in the late 1920s. Several economic events, including a stock market crash and subsequent bank failures, coincided to create a dramatic financial shock felt all over the world.

During the Great Depression, America’s economy declined by about 30% over four years. The unemployment rate skyrocketed to an unprecedented 25%, and wages fell by 42%. The Depression also caused a crisis in the agriculture industry as food and cotton prices fell, causing farmers to default on their loans.

To bring the Depression to an end, President Franklin D. Roosevelt passed the New Deal. The comprehensive piece of legislation helped recover and reform the American economy by creating millions of jobs and expanding electricity access to rural areas.

The New Deal also established financial regulatory agencies to offer social safety nets and prevent some of the economic shocks that caused the Depression. This included the creation of the Social Security Administration, the Federal Deposit Insurance Corporation and the Securities Exchange Commission.

The 2008 Financial Crisis

At its onset, the financial crisis that began in 2007 was similar in its severity to the Great Depression. The country faced comparable levels of job loss and reduction of private demand. By some metrics, the crisis was even worse than the Depression, with significantly larger reductions of wealth and global trade.

However, the cataclysmic effects of an economic depression were avoided during the 2007-2009 financial crisis. Congress and President Barack Obama passed a range of public policy measures to shore up the struggling financial system. This response helped the country recover, and by 2010, the economy was once again showing growth.

This period of economic contraction is now known as the Great Recession. The Great Recession has been the longest-lasting recession since prior to World War II, according to the NBER.

Can a Recession Lead to a Depression?

Periods of economic contraction, be they recessions or depressions, are declared retroactively by the NBER. This is because the metrics used to measure the economy’s growth are reported on a lag. It’s often difficult to know whether the economy is in a recession or a depression as it is happening.

The economic symptoms that precede a depression are very much the same conditions that precede a recession. These include aggressive inflation, worsening unemployment and declining property sales.

Because of this, it’s not really accurate to say that a recession could lead to a depression. What we might say instead is that the longer a period of economic contraction lasts and the more devastating its effects are, the more likely it will be considered a depression rather than a recession.

Are We Headed Towards a Recession or a Depression in 2022?

Recessions and depressions can have many potential causes, so it’s difficult to predict whether the United States could face an economic contraction in 2022.

The first half of the year has shown some of the symptoms that historically precede a downturn. Inflation has hit record highs, which the Federal Reserve has attempted to stifle by issuing multiple interest rate hikes. Rising interest rates and rising inflation have proven to be signs of economic decline in the past.

Still, the American economy holds strong by other metrics. The country is creating hundreds of thousands of new jobs each month, and consumer spending has not waned, reporting modest growth through the first two quarters of 2022.

The aftermath of the coronavirus pandemic has caused a massive reorganization throughout the country, including its economic markets. Because of this, it’s more difficult than usual to predict where the economy might be headed.

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