What’s the difference between a recession and a depression? HowStuffWorks

what is the difference between a depression and recession

In other words, if the NBER says we’re in a recession or a depression, we’re probably in one. The Great Depression was the longest and most severe financial crisis of its kind in the U.S. during the industrial era. It started with a recession where the country saw spending decline and subsequent manufacturing decline, but before long had evolved into a depression that rippled out across the world.

  1. Before the Great Depression of the 1930s, any downturn in economic activity was referred to as a depression.
  2. Dodd-Frank reforms affected the entire U.S. financial system, including banks, investment firms and insurance companies.
  3. The Wall Street Reform and Consumer Protection Act—also known as the Dodd-Frank Act— was instituted in 2010.
  4. One common explanation of a recession is two or more consecutive quarters of negative gross domestic product growth (GDP), though it’s not an official definition.

As a result, money becomes scarce as wages drop and people spend less. To combat the decline, the Federal Reserve may step in and change interest rates to jumpstart markets again by infusing them with cash. Opinions expressed here are author’s alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication and are updated as provided by our partners. Some of the offers on this page may not be available through our website.

Depressions are generated by the same factors that cause a recession. You can look at depression as an extended recession on the graph of https://www.currency-trading.org/ the business cycle wave. Unemployment rises, gross domestic product (GDP) drops off, stock prices fall and the stock market crashes.

But that doesn’t mean a down week in the stock market qualifies as a recession—economic analysts focus on business cycles on the scale of months to years. Recessions are widespread and typically impact almost every sector of the economy. 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. Since the Great Depression, there have been 14 recessions, which are part of the normal economic cycle. Economists keep waffling on whether or not the U.S. is going to head into one in 2024 after fears about a 2023 recession haven’t come to pass yet. The only possible warning sign is an increase in delinquencies on things like car loans and credit cards.

To view important disclosures about the Experian Smart Money™ Digital Checking Account & Debit Card, visit experian.com/legal. When it comes to determining when the U.S. has entered or emerged from a recession, the National Bureau of Economic Research (NBER) is considered the quasi-official arbiter. Banking services provided by Community Federal Savings Bank, Member FDIC.

Causes of a Recession

We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy. Typically, people who completely exited stocks during a recession came to regret it. The 2008 and 2020 recession sell-offs were followed by long rallies that quickly brought major indexes back above pre-recession levels. It’s easy to get caught up in anxiety at moments like these, and there are definitely times when taking some money off the table makes sense. However, if you’re in the market for the long term, remind yourself that these drastic dives happened decade after decade over the last 100 years, but the overall direction of stocks remained higher throughout.

The United States hasn’t had anything even close to a depression in the post-war period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent. Countries such as Finland and Indonesia have suffered depressions in recent memory using this definition. https://www.investorynews.com/ But people do not turn to the dictionary for cheap puns and bad jokes (we hope); they come in search of steely-eyed realism and hard truths. So here are some things we can tell you about recessions, depressions, and the differences between the two. The impact of a severe recession can take years to overcome.

How long is a recession before it becomes a depression?

These situations create a downward spiral of unemployment, loan defaults, and bankruptcies. 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. Recessions have lasted for approximately 10 months on average since 1945. Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date.

what is the difference between a depression and recession

The government has also put in place safety nets for people who lose their jobs, in the form of unemployment benefits and fiscal stimulus—aka stimulus checks. These programs didn’t exist during the Great Depression, and as a result, many people https://www.topforexnews.org/ were left without any income when they lost their jobs. 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.

Four clues a recession may be looming

The NBER has no formal definition for a depression but points out that the last event widely regarded as a depression was the Great Depression of the 1920s and ’30s. During this depression, the national unemployment rate climbed to nearly 25% and the GDP declined by nearly 27%. A depression can also greatly reduce international trade and wreak havoc globally. One common explanation of a recession is two or more consecutive quarters of negative gross domestic product growth (GDP), though it’s not an official definition.

However, the long-lasting effects of the Panic of 1837 turned into a depression that lasted through 1842. During that period, total bank assets were nearly chopped in half, commercial credit was hard to come by and business went cold. The stock market will continue to fall if confidence isn’t restored, and the extreme loss of confidence may also trigger a recession. The devastation of a depression is so great that the effects of the Great Depression lasted for decades after it ended. The Federal Deposit Insurance Corp. was created to protect bank depositors’ accounts and the Securities and Exchange Commission was established to keep U.S. stock markets in check. An economic depression refers to “a severe, sustained period of economic weakness.” The last one, the Great Depression, technically ran from October 1929 to 1933, but the U.S.’s economy didn’t recover until around 1939.

The CARES Act sent a $1,200 stimulus check to eligible adults earning up to $75,000. A crash can scare consumers, who then buy less, and this triggers a recession. The sale of stocks provides them with the funds they need to grow. Stocks are a piece of ownership in a company, so the stock market is a vote of confidence in the future of these companies. Consumers will stop buying and businesses will lay off workers when there’s no confidence in the future.

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. Still, that recession cut deep, with the unemployment rating hitting 14.8% as 22 million jobs were slashed.


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