Economic downturns are hard for everyone. The average person might be worried about losing their job while businesses worry about laying off employees. But what is the difference between the two buzz words of downturns: recession vs depression?
A depression is worse than a recession. It is defined as a severe recession that affects more than one country and has lasting effects globally.
If you are looking to learn more about the difference between a recession and a depression and what to expect during either, keep on reading.
Differences Between Recession and Depression
A depression is deeper than a recession. However, because there has only been one depression in United States history, it might be challenging to define the distinction between a recession and one quantitatively.
A depression often lasts years as opposed to months, and it is characterized by higher unemployment rates and a more abrupt decrease in GDP. Whereas a depression is typically severe enough to have effects elsewhere, a recession is frequently localized.
The general public occasionally conflates the terms “depression” and “recession” since economists do not have a consensus on what exactly constitutes a depression.
But when you contrast the differences between the Great Recession in 2008 and the Great Depression in 1929 you can easily see what separates them.
| Great Recession | Great Depression |
| Lasted two years starting in 2007 and ending in 2009 | Lasted a decade starting from 1929 to 1939 |
| Unemployment rate was at 10.6% | Unemployment rate was at 24.9% at its peak |
| Was generally confined to the United States economy | Was felt throughout the global economy |
| GDP dropped a total of 4.3% during the Great Recession | GDP dropped a total of 30% during the Great Depression |
By looking at the differences between these two events, it is easy to see how much more severe and long-lasting a depression can be in comparison to a recession.
For some modern day context on the pandemic and what economists were predicting would happen, take a look at the video below which compares recessions and depressions within the context of the most recent world events.
What Defines a Recession?
A real gross domestic product (GDP) decrease for two consecutive quarters is a common definition of an economic recession, although it is not quite that straightforward.
During a business cycle, the GDP may decline for a while, but that does not always indicate a downturn in the economy.
The National Bureau of Economic Research is a 100 year old non-profit organization that determines the start and end of recessions in the United States. They have a list of key indicators when determining a recession that include:
- Real GDP decline
- Real income decline
- Unemployment percentage rise
- Slowing of industrial production and retail sales
- Slowing of consumer spending
Recessions are not always characterized by a single component, according to the NBER’s more comprehensive perspective on the economy.
However, because so many of these variables are interconnected, a major decline in the GDP, for example, might have a negative impact on consumer spending or unemployment.
To date, the United States has seen 51 recessions with the most recent being a two month period during 2020 caused by the COVID pandemic.
What is a Depression?
Although a severe decline in economic activity that lasts for several years is generally acknowledged to be an economic depression, its precise definition and characteristics are less apparent.
The NBER points out that economists have different ideas about how long a depression lasts.
While it is generally accepted that a depression lasts until economic activity has nearly been restored to normal levels, other experts argue that a depression only occurs while economic activity is dropping.
The most famous depression in the United States, and most likely the world, was the Great Depression which lasted from 1929 and went into the 1940s. Several things cascaded which ended up causing the Great Depression in the US and included:
- Downturn in the overall economy
- Rising unemployment rates
- Decline in manufacturing
- Overvaluing of stocks
All of these things ended up colliding and causing the stock market crash which occurred toward the end of the year in 1929. This event is commonly referred to as the start of the Great Depression.
FAQs about Recessions and Depressions
What happens first, a recession or a depression?
There is only one example that can be used in US history, however the Great Depression first started out as a recession in 1929. Based on this, it can be assumed that a recession will always occur before a depression, even if only for a short time.
How many recessions and depressions have there been in the United States?
To date, there have been a total of 51 recessions in the United States with only one depression, the Great Depression.
Was 2008 a recession or a depression?
The economic downturn in the United States in 2008 is known as the Great Recession and was caused by the bursting of the US housing bubble and global financial crisis.
How long does it take for a recession to turn into a depression?
A recession, a typical feature of the business cycle, often happens when GDP declines for at least two consecutive quarters. On the other hand, a depression is a severe decline in economic activity that lasts for years as opposed to just a few quarters.
How often do recessions occur in the United States?
Since 1857, a recession has occurred about every three and quarter years. Economists consider recessions a normal feature of the business cycle.
What causes a recession?
There are several key factors that can start a recession which include:
- A decline in consumer and business confidence
- Decrease in demand in response to lost confidence
- Economic expansion peaks and then shrinks
When continued economic expansion reaches its peak, reverses course, and continues to shrink over time, a recession occurs.
Conclusion
While no one wants to live through either a recession or a depression, making it through a recession is an easier feat to achieve. Recessions do not last as long and are not as hard on a nation’s economy as a depression can be.