Economic Recession vs Depression: Key Differences Explained Understand the Economy, Empower Your Future

Therefore, it is important that the information be evaluated in light of the relevant circumstances. S&P Dow Jones Indices LLC; U.S. Bureau of Economic Analysis via FRED®. Past performance is not a reliable indicator of future performance. That’s why it often feels like markets and real life are out of sync. So while crashes and recessions can show up together, one doesn’t always lead to the other. Marianne Hayes is a content strategist and longtime freelance writer who specializes in personal finance topics.

• It consisted of two separate recessions in the U.S., one from 1929 to 1933 and the other from 1937 to 1938.
• When there is a decline in consumer demand the companies will not be able to expand their business, and they stop recruiting personnel.
• During this depression, the national unemployment rate climbed to nearly 25% and the GDP declined by nearly 27%.
• First recorded in the mid-1600s, recession comes from the Latin recessiō, a form of the verb recēdere, “to go back, withdraw.” Recēdere is ultimately the source of the English word recede and recess.
• Emily’s work has appeared in CNBC, MarketWatch, Business Insider, USA Today, The Christian Science Monitor and the Chicago Tribute, among other websites and publications.

What these economic terms mean for you

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How does a recession impact the average person?

During an economic depression, unemployment rates rise into the double-digits and stay there for years, leading to a complete collapse in demand for consumer goods. Some of them cause deep declines in the economy and lead to widespread unemployment, while others are so mild that most regular competitive, consistent institutional trading people barely notice them. A recession is a widespread decline in economic activity that lasts for at least a few months. Recessions are typically marked by a significant decline in economic activity, accompanied by rising unemployment.

Still, for investors, confusing the two can lead to poor decisions. Panic-selling during a crash might mean locking in losses right before a rebound. On the flip side, brushing off signs of an economic downturn could leave your portfolio exposed to longer-term damage. When recession, turns out to be more severe and continues for a long term, in one or more economies, the situation is known as Depression.

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. 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.

The Causes of Recession and Depression

For example, this definition ignores any changes in the unemployment rate or consumer confidence. Second, by using quarterly data this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected. The difference between a recession and a depression is significant, impacting economies on various levels. While both phases represent economic downturns, they differ in scale, duration, severity, and the resulting impact on a nation’s populace.

What’s the difference? Defining economic and market downturns

But in most cases, a recession doesn’t lead to an economic depression. The word recession is commonly used in the context of economics. First recorded in the mid-1600s, recession comes from the Latin recessiō, a form of the verb recēdere, “to go back, withdraw.” Recēdere is ultimately the source of the English word recede and recess. Social recessions can take a toll on our physical and mental health, and can weaken our social bonds and communities. Loneliness and isolation are some symptoms of a social recession, which can particularly harm people who are already alone.

• They are unpredictable, although plenty of people try to predict them.
• So, an expansion runs from a trough to a peak, and a contraction—or recession—spans a peak to a trough.
• One unfortunate byproduct of a recession is that millions of people often lose their jobs.
• This trend lowers household income and spending, which consequently causes many businesses and households to delay making large investments or purchases.
• One may be on the horizon when unemployment is extremely high, assets are routinely devalued, and consumers are defaulting on debt.
• They are irregular in length, and their severity is reflected by the economic variables of the time.

As an investor, that means keeping your portfolio diversified to include safe haven picks that do well even in a downturn. As a responsible adult, it means saving regularly, paying your debt down, and maintaining an emergency fund. A commitment to a balanced budget could logically be met with cuts in government spending.

‘Recessions’ vs. ‘Depressions’ in the Economy

Job losses, pay freezes, rising prices – these things affect day-to-day life. It stings if you’re invested, but it doesn’t usually hit the average household directly. The US economy has experienced 12 recessions since World War II, with the average lasting about 10 months. The most severe – the Great Recession (2007–2009) – lasted 18 months. Offer pros and cons are determined by our editorial team, based on independent research.

U.S. unemployment reached a level of just under 25% in 1933 and remained in the double digits until 1941, when it finally fell to 9.66%. The devastation of a depression is so great that the effects of the Great Depression lasted for decades after it ended. It is much more severe than a typical recession, which is considered a normal part of the business cycle. An economic depression is a major, long-term decline in economic activity. They look at many different indicators besides GDP, including gross domestic income, unemployment, manufacturing, and retail sales. All of these tend to decline significantly during recessions.

One may be on the horizon when unemployment is extremely high, assets are routinely devalued, and consumers are defaulting on debt. All of these factors were at play before the U.S. entered the Great Depression in late 1929. In August of that year, just before the market crashed, the unemployment rate was 0.04%. Dwindling consumer demand and subsequent manufacturing slowdowns also paved the way for the Great Depression. Before the Great Depression of the 1930s, any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913.

The first lasted for 43 months, from August 1929 to March 1933. Recessions have lasted for approximately 10 months on average since 1945. 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. The 2007–2009 financial crisis was the most severe recession since the Great Depression. So while there are risks – sticky prices, geopolitical flare-ups, and global uncertainty – this doesn’t look or feel like a recession. If anything, we’re in a phase of slowing but stable growth, marked by caution, not collapse.