What Is the Difference Between a Recession and a Depression?

This means businesses and individuals may struggle to get loans for homes, education, or business expansion. Limited access to credit further slows down economic activity and weakens the ability of businesses to recover quickly. Manufacturing and production industries are particularly vulnerable during recessions. With consumer demand decreasing, companies reduce production, lay off workers, and in some cases, shut down factories. A decline in industrial output also affects suppliers, logistics companies, and related businesses, causing a broader economic slowdown. Unexpected events like the COVID-19 pandemic or oil price shocks can disrupt economic activity, causing businesses to shut down and consumers to cut spending, leading to a recession.

Difference between definition of recession and depression

If too many borrowers default on loans, banks reduce lending, making it harder for businesses and individuals to spend and invest, slowing down the economy. When inflation rises too fast, central banks increase interest rates to control it. Higher interest rates make borrowing more expensive, reducing consumer and business spending, which can slow economic growth and lead to a recession. The NBER notes that economists differ on the period of time that designates a depression.

• One common challenge investors encounter during economic downturns is the impact of falling asset values on their net worth.
• There are five indicators that economists can use to determine whether or not the economy is in a recession.
• Economic conditions were so bad that prices fell 10 percent (deflation), banks failed and millions lost their homes.
• When businesses anticipate a slowdown, they cut jobs, leading to rising unemployment.
• This increased competition for jobs can undermine employees’ power to demand adequate compensation and, in turn, place downward pressure on salaries and wages.

What Were Some of the Worst US Recessions?

Recessions are common in the business cycle and often corrected by monetary and fiscal policies, whereas depressions require extensive government intervention and structural economic reforms. A recession can have widespread and long-lasting effects on an economy, disrupting businesses, employment, and financial stability. As economic activity slows, companies struggle with declining revenues, individuals face job losses, and governments experience budget shortfalls. While recessions are a natural part of the economic cycle, their impact can vary in severity depending on the underlying causes and how governments and central banks respond.

What is an Economic Recession, and how is it different from a depression?

In economics, the words recession and depression are used to refer to economic downturns. One could say that while a recession refers to the economy “falling down,” a depression is a matter of “not being able to get up.” Economic downturns result in reduced tax revenue, prompting governments to lay off workers. Many state governments, in particular, must balance their budgets each year, which can cause them to slash jobs. High interest rates make it more expensive for consumers to borrow money, meaning people are less likely to spend on major purchases like houses or cars. Companies will probably reduce their spending and growth plans as well because the cost of financing is too high.

But no recession after the Great Depression has been considered long or severe enough to be termed a depression. It is much more severe than a typical recession, which is considered a normal part of the business cycle. Recessions are a normal part of the business cycle and occur every 5 to 10 years, while depressions are rare. While investing for the long term is important, ensure your portfolio is diversified across different asset classes, such as bonds, cash, and recession-proof stocks like utilities and healthcare.

The most famous depression in financial advisor fees U.S. history was the Great Depression. Recessions are a normal part of the business cycle, and fortunately, they tend to be brief. But as the NBER points out, the recovery period after a recession to return to peak economic activity can be lengthy. A financial crisis can make people lose confidence in the banking system.

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• However, it’s a little tricky to concretely and quantifiably describe the difference between a recession and a depression, mainly because there’s only been one.
• At its peak in October 2009, the unemployment rate reached 10 percent.
• One example of such a shock was the COVID-19 outbreak, which triggered a brief recession.
• Economists use data-driven approaches to ensure policies remain effective and responsive to changing conditions.
• The Great Depression lasted ten years, and the depression that followed the panic of 1837 lasted six years.

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. Oscar Wilde, Winston Churchill, and Mark Twain did not, we regret to inform you, come up with many of the famous things they are credited with having said. For example, the Fed and the U.S. government responded very swiftly to the economic effects of the COVID-19 pandemic. However, there is no fixed definition of a depression and no organization that is responsible for determining it.

Triggered by the collapse of the U.S. housing market and high consumer debt, the Great Recession resulted in a 5-percent decline in the GDP. At its peak in October 2009, the unemployment rate reached 10 percent. In 1973, oil and gasoline prices skyrocketed thanks to the OPEC oil embargo. Higher energy costs raised the price of goods and services across the economy (inflation). President Nixon tried to rein in inflation by instituting price and wage freezes, but that resulted in massive layoffs.

A perfect example is the recession that coincided with the COVID-19 pandemic. The global pandemic began in early 2020, and during March, April, and May of that year, the nation’s employers shed 1.5 million jobs, according to figures from the Bureau of Labor Statistics. Consumer sentiment substantially impacts the economy, accounting for nearly 70% of US GDP. When consumers tighten their purse strings, it can tip the economy into recession.

For example, if deflation occurs, lowering interest rates encourages spending and prevents businesses from reducing wages or cutting jobs. With job uncertainty and reduced income, consumers become more cautious about spending money. Non-essential purchases, such as dining out, travel, and luxury items, decline significantly.

Black Thursday brings the roaring twenties to a screaming halt, ushering in a world-wide an economic depression. Closed petrol pumps at a Getty petrol station in the United States during the global oil crisis, caused by the OAPEC’s oil embargo, circa 1975. The U.S. government doesn’t decide when the economy has officially entered a recession. Since 1920, that responsibility has fallen to the National Bureau of Economic Research (NBER), an independent nonprofit organization. Tim Maxwell is a former television news journalist turned personal finance writer and credit card expert with over two decades of media experience.

Money market mutual funds are funds based on low-risk investments in short-term, high-quality debt. They’re highly liquid, earn better returns than savings accounts and are often used in brokerage accounts as a “sweep” vehicle for uninvested cash. The 2007–2009 financial crisis was the most severe recession since the Great Depression.

A depression can also greatly reduce international trade and wreak havoc globally. A recession is a downward trend in the business cycle, one that is characterized by a decline in production and employment. This trend lowers household income and spending, which consequently causes many businesses and households to delay making large investments or purchases. A recession is a widespread decline in economic activity that lasts for at least a few months. Stick to a long-term financial plan and consider consulting a financial advisor before making major investment decisions. Relying on a single source of income can be risky during economic downturns.

It’s business behavior at other times, such as poor management or credit crunches. 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. Poor fiscal policies, such as excessive government spending or sudden tax hikes, can strain economic growth.

An economic depression is a recession that is either very long, very severe, or both. Having 3 to 6 months’ worth of living expenses saved in an emergency fund provides a financial cushion in case of job loss or unexpected expenses. Keep these savings in a high-yield savings account for easy access.

Recessions last an average of ten months in the United States, and typically last between two and 18 months. The Great Depression lasted ten years, and the depression that followed the panic of 1837 lasted six years. Unlike the early years of the Great Depression, Congress used expansionary fiscal policy to assist Americans. The CARES Act sent a $1,200 stimulus check to eligible adults earning up to $75,000. The devastation of a depression is so great that the effects of the Great Depression lasted for decades after it ended. Offer pros and cons are determined by our editorial team, based on independent research.