Recession vs depression: Differences between the economic downturns

As profitability declines, so, too does the value of companies’ stocks. Recessions are like ouroboros — the snakes that eat their own tails, forming a never-ending circle. It’s business behavior at other times, such as poor management or credit crunches.

High interest rates

While there are lots of organizations dedicated to sniffing out recession, the National Bureau of Economic Research (NBER) is the group whose opinion on the matter is most widely relied upon. In other words, if the NBER says we’re in a recession or a depression, we’re probably in one. 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. One very noticeable impact of an economic downturn is a tighter labor market. When the economy goes into recession, many jobs will be eliminated, both in the public and private sectors. This Algorithmic trading strategist can increase the number of applicants for every available position, resulting in a highly competitive labor market.

For example, economists like to joke that «a recession is when your neighbor loses his job; a depression is when you lose your job.» But people do not turn to the dictionary for cheap puns and bad jokes (we hope); yankee bond markets law and legal definition 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.

Difference between definition of recession and depression

GDP, so when these individuals tighten up their purse strings, it can tip the economy into recession. A depression refers to a sustained downturn in one or more national economies. It is more severe than a recession (which is seen as a normal downturn in the business cycle).

In the meantime, a variety of prominent figures have been casting their informal votes for yes-it’s-a-recession (ARK Invest CEO Cathie Wood) and no-it’s-not (President Joe Biden). Officially, the most recent recession occurred between February 2020 and April 2020. Largely triggered by the COVID-19 pandemic, the 2020 recession saw GDP shrink by about 5% in the first quarter and 31.4% in the second bitcoin futures trading information quarter. Amid lockdowns and layoffs, unemployment reached 14.7% in April 2020. This was not the first time that someone attempted to make a joke explanation about the difference between a recession and a depression; these jokes (using a very broad definition of the word joke) go back to at least the 1930s.

Those who retire into the teeth of a recession often find a huge chunk of their savings is gone, forcing them to either live on less than they’d expected or to reenter the workforce. An economic depression is typically understood as an extreme downturn in economic activity lasting several years, but the exact definition and specifications of a depression are less clear. It’s important to note that business cycles do not occur at predictable intervals. Instead, they are irregular in length, and their severity is reflected by the economic variables of the time. That said, the average post-World War II business cycle lasted 65 months, according to the Congressional Research Service. It is worth noting that the confidence of business executives, as well as other key decision makers in corporations, has a substantial impact on the health of the economy.

There are many theories about what caused the Great Depression. A recession is a widespread economic decline that typically lasts between two and 18 months. A depression is a more severe downturn that lasts for years.

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 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. Definitions vary, but a depression typically refers to a severe and long-lasting economic decline that can affect several countries simultaneously.

There is no official definition for a depression, even though some have been proposed. In the United States the National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions. A GDP decline of such magnitude has not happened in the United States since the 1930s. However, there’s an actual group of people tasked with formally declaring recessions in the U.S., and it uses a slightly different, less specific definition of a recession. The National Bureau of Economic Research’s business dating cycle committee says only that a recession is «a significant decline in economic activity that is spread across the economy and that lasts more than a few months.»

Commonly Confused

Instead, consider your asset allocations and which sectors you have exposure to. Certain sectors tend to perform better than others during recessions, and bonds and other fixed-income securities can sometimes be a line of defense. In contrast, it took the market decades to recover from the 1929 crash. Although decades-long recessions aren’t likely today, rebounds might not occur as quickly as they did in 2008 or 2020 if the Fed doesn’t respond by quickly cutting rates.

Definition of Depression

Unfortunately, there’s no graph that economists can follow in real time to see whether or not a business cycle has entered recession. And even once it’s clear that the economy has entered decline, it’s hard to tell if the recession will be a long or short one. Graphs that depict market decline usually come about after a recession has already made its presence known in the markets. In fact, some economists believe they’re a natural part of an economic cycle that is characterized by peaks and troughs. If recessions are economically painful, then depressions are like having your financial teeth yanked without Novocain. What exactly is the difference between a recession and a depression?

‘Recessions’ vs. ‘Depressions’ in the Economy

1. Although the word can strike fear in the hearts of white collar and blue collar workers alike, recession in and of itself isn’t a bad thing.
2. Stocks are a piece of ownership in a company, so the stock market is a vote of confidence in the future of these companies.
3. When the economy starts to contract, revenues decline, which gives companies substantial incentive to lay off employees to turn a profit.
4. «The U.S. economy, we think, is so vulnerable to recession by the end of the year and extending into early 2024,» Schlossberg said.
5. Generally speaking, a depression lasts years rather than months and typically causes higher unemployment rates and a sharper decline in GDP.

Further, economic downturns result in reduced tax revenue, which can prompt governments to lay off workers. Many state governments, in particular, must balance their budgets each year, which can cause them to slash jobs. Consumption also declines, reducing the overall demand for goods and services created by corporations. This, in turn, can reduce profitability and motivate companies to lay off employees to ensure their bottom line remains healthy.

These estimates rise and fall based partly on economic winds, so when you see them fall steadily, it’s often a sign that all may not be well. Still, that’s kind of a clinical way to think about it, and doesn’t fully embrace the profound unhappiness a recession can cause for investors, companies, and anyone who needs to put food on the table. Most analysts say a recession becomes a depression when the GDP decline exceeds 10%. But Schlossberg said that’s another rule that can «easily be broken.» The National Bureau of Economic Research (NBER) has declared a dozen economic recessions since World War II, the latest of which took place in early 2020. While there are a few rules of thumb to consider when labeling a recession, experts note that those rules can be broken.