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Groceries are more expensive these days. Major corporations are planning layoffs. Home sales are dropping.
Thanks to these problems in the U.S economy, more and more people are worried about the possibility of a recession—or even a depression.
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. Here’s a look at the key differences between them.
Although people believe there’s more than one way to define a recession, the official definition in the U.S. comes from the National Bureau of Economic Research (NBER).
The NBER defines a recession as a period of significant economic decline that affects multiple segments of the economy and lasts more than a few months.
Recessions are characterized by the following economic developments:
- High unemployment. In a recession, unemployment rates rise as companies lay off workers to adjust to declining demand.
- Falling home sales and prices. Recessions typically lead to a decrease in home sales and prices, as buyers have less money available and are more cautious about making big purchases.
- Stock market declines. Stock prices fall as investors lose confidence in the economy as a whole and companies’ ability to make profits.
- Stagnant or decreasing wages. In a recession, wages often stagnate or decrease as companies try to cut costs.
- Negative gross domestic product (GDP). The combination of the factors above means that consumers spend less, driving down demand for goods and services. As a result, the GDP contracts during a recession.
Recessions are a normal part of the economic cycle. In fact, there have been 13 recessions since World War II.
What Is a Depression?
While people often worry about economic depressions, they are much rarer than recessions.
Definitions vary, but a depression typically refers to a severe and long-lasting economic decline that can affect several countries simultaneously.
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.
As a result, companies reduce production or shut down manufacturing facilities, with fewer exports.
The Great Depression is a paradigmatic example. It lasted from 1929 to 1939 and was devastating in terms of its severity and impact. During the Great Depression, the U.S. faced:
- Skyrocketing unemployment. At its worst point, nearly 25% of the labor force was unemployed. Approximately 12.8 million people were out of work.
- Plummeting wages. People who managed to keep jobs earned significantly less than before the Depression. Wages fell 42.5% between 1929 and 1933.
- Significant declines in GDP. Real GDP fell 29% between 1929 and 1933.
- Widespread bank failures. Approximately 7,000 banks, nearly a third of the banking system, failed between 1930 and 1933.
How Does a Recession Differ from Depression?
Depressions may sound similar to recessions but tend to be much more severe. Most importantly, they tend to last for a much longer period of time.
To put it into perspective, consider the differences between the Great Depression and the Great Recession, which lasted from December 2007 to June 2009. The Great Recession was the longest recession since World War II and was notably severe compared to other recessions.
The Great Recession had a major impact on the economy. But even though it was incredibly harmful, it didn’t come close to the severity of the Great Depression.
Could Another Great Depression Happen?
Could another depression occur soon? The short answer is no. Various measures have been put in place to prevent another depression from happening.
During the Great Depression, the Federal Reserve failed to take action to control the money supply and prices, resulting in deflation. Since then, the Federal Reserve has taken a much more active role in managing and preventing an economic crisis.
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 were left without any income when they lost their jobs.
The banking system is much stronger than it was during the Great Depression. Since then, banks have been backed by the Federal Deposit Insurance Corporation (FDIC), and deposits are insured for up to $250,000.
The Wall Street Reform and Consumer Protection Act—also known as the Dodd-Frank Act— was instituted in 2010. Dodd-Frank reforms affected the entire U.S. financial system, including banks, investment firms and insurance companies. The goal was to make the financial system stronger and less likely to fail by improving transparency and accountability.
So while recessions are a normal part of the business cycle, another depression is unlikely to occur. Thanks to the measures put in place by the government, the banking system is stronger and more stable, and the economy is better equipped to weather any downturns.