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Recession vs. Depression: What’s the Difference?

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Since the Great Depression, there have been 14 recessions, which are part of the normal economic cycle. As the debate rages on about whether the U.S. is in a recession — which generally occurs when the U.S. economy has shrunk for two straight quarters — the answer isn’t so simple. And it’s not up to politicians to make the determination.

Yet the topic comes up at a crucial time. The Commerce Department announced that the country’s gross domestic product fell at an annual 0.9% pace in the second quarter. That’s after GDP shrunk at a 1.6% pace in the first three months of the year — establishing the two consecutive declines.

So what exactly is a recession? And what’s the difference between a recession and a depression? A recession is a period of significant, lasting decline in the economy, while a depression is more sustained and severe and has a more widespread impact.

What Is a Recession and Who Declares It?

While economic indicators such as GDP might a recession is in effect, or on the way, and many Americans might feel like the country is in one due to financial pressures that come with inflation, it’s officially up to the National Bureau of Economic Research’s “Business Cycle Dating Committee” to make the call. It defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

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This depends on a number of monthly economic measures, including income, spending and employment. Complicating matters is that employment has remained strong, with July’s unemployment rate at 3.5%, smashing expectations by adding 528,000 jobs. Additionally, the GDP data will be updated several times in the months ahead.

Even then, the NBER won’t announce whether the country has entered into a recession until it has insurmountable evidence. That much-anticipated call could happen even after a recession is over.

NBER president and committee member James Poterba, who is a professor of economics at MIT, told The Washington Post, “By far, the most important thing to try to convey is that the committee is not trying to do real-time dating of whether we’re in a recession.”

Historically, the GDP measurement has been a useful guide. As reported by The Associated Press, Michael Strain, an economist at American Enterprise Institute, noted that a recession often follows when the economy shrinks for two consecutive quarters. In fact, the last 10 times when there have been two quarters of economic contraction, recessions have resulted.

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What Might Cause a Recession?

A number of factors can contribute to a recession, namely abrupt changes to the economy — like the COVID-19 pandemic — inflation, bursts in stock market bubbles and defaults as a result of debt, which fueled the Great Recession.

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.

It’s important to note that the end of recessions identified by the NBER doesn’t necessarily correlate with the financial situations of Americans. They simply mark the period when the economy stopped contracting.

When Does an Economic Downturn Become a Depression?

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. During the Great Depression, GDP dropped by 30% and 25% of the labor force was unemployed. It is widely recognized as the most dramatic economic downturn in U.S. history.

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There are a number of factors that led to the Great Depression. Key among them is the stock market crash of 1929.

“The crash was not a cause, but a triggering event,” Barry M. Mitnick, a professor of business administration and of public and international affairs at the University of Pittsburgh’s Katz Graduate School of Business, told Business Insider.

Unmitigated spending and lending habits during the Roaring 20s helped lead the way, followed by delayed action by the government to step in, tariffs that led to other countries heaping their own tariffs on U.S. goods and bad moves by the Federal Reserve, such as raising interest rates and allowing troubled banks to fail. All these factors helped the Great Depression go on for so long.

In general, during economic depressions, the stock market and consumer confidence fall and bankruptcies — both personal and business — skyrocket. The drop in economic activity lines up with a fall in employment and production.

Mechanisms To Safeguard Against Another Depression

In response to the Great Depression, the federal government beefed up its tools to prevent recessions, which are part of the normal business cycle, from ballooning into depressions.

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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.

There’s now unemployment insurance and more tools available in the government’s monetary policy toolkit, which it took advantage of during the Great Recession. The Fed responded by cutting interest rates, and the government bailed out several big industries, leading to an under-two-year downturn and long-running growth.

FAQ

  • Was 2008 a recession or depression?
    • The economic situation in the U.S. in 2008 was a recession, not a depression.
    • Fueled by the housing market collapse, the Great Recession was the worst economic downturn to hit the U.S. economy since the Great Depression. However, economists largely agree that it did not flare into a depression.
    • This is in part because it lasted about a year and a half December 2007 to June 2009 whereas the Great Depression lasted years and saw much more substantial drops in the stock market and GDP and had much higher rates of unemployment, poverty, homelessness and bankruptcies, among other factors.
  • Does a depression follow a recession?
    • Yes, but not always. A depression will always be preceded by a recession, but not all recessions lead to depressions.
    • An economic depression refers to "a severe, sustained period of economic weakness," according to the National Bureau of Economic Research, the nonprofit think tank whose Business Cycle Dating Committee is the recession scorekeeper.
    • There are no set benchmarks that define when a recession becomes a depression, but a depression clearly has a more significant, longer-lasting impact. Changes in monetary policy have so far allowed the government to stave off another depression.

Data is accurate as of Aug. 8, 2022.