Recession and depression both talk about a downturn in an economy and a slowdown in economic activities. In both scenarios, there is widespread unemployment, a fall in income, a drop in demand, and more. Therefore, often the public uses both terms interchangeably. Even though there are quite a few similarities between the two terms, common indicators look like heading to the negative zone in both situations. However, both are quite different from each other. To better understand their meaning and usage, we need to look at the differences between recession vs. depression.
Recession vs. Depression – Differences
Though both recession and depression have similar indicators and causes, they differ based on severity, duration, and overall impact.
A depression usually spans for years, unlike a recession that lasts for a few months. In a recessionary phase, the economy drops for at least two quarters, while in a depression, the economy continues to suffer at least for a couple of years. Further, in a recession, the GDP slows down for a few quarters before it goes into negative. But at the time of the Great Depression, the U.S. GDP was negative for six years (out of ten).
The U.S. has seen 33 recessionary phases since the year 1854. Moreover, the average length of a recession in the U.S. since 1945 is 11 months.
On the other hand, there has been just one depression, and that is the Great Depression. This depression was for ten years. As per the data from the National Bureau of Economic Analysis, this depression was two recessions. One recession was of 43 months (August 1929 to March 1933), and the other was for 13 months (May 1937 to June 1938).
Recession is generally limited to one country or a region, while depression has severe global impacts, and many countries at large face a similar situation. It is the impact of global economic integration. The impact level depends on how much a country’s economy is globally integrated or decoupled.
We can say that recession is a downturn in the economic scenario where the country sees a drop in production and unemployment.
Depression, on the other hand, is a significant and severe downturn in economic activities. In such a scenario, there is a sharp drop in unemployment, GDP, and industrial production, and international trade.
Moreover, the severity of depression is such that it takes a country decades to recover from it. For example, at the time of the Great Depression, the stock market didn’t recover until 1954.
Recession vs. Depression – What is worrisome?
A recession, as said above, usually lasts for a few months/quarters. As long as you have a job or enough money in your bank account to get you through the crisis, you may not worry. Even if you don’t have a job, the U.S. government does give additional unemployment benefits and other support at the time of crisis. For example, at the time of the Coronavirus pandemic, the U.S. government gave stimulus checks, unemployment benefits, and many more benefits. So, since the recession is a temporary phenomenon and going to be short-lived, it may not be worrisome.
Also Read: Disinflation vs Deflation
If you have a business and deal with products that are part of an essential category, then you may not have to worry much because these are the products always in demand, being the basic necessity for a living. If you deal with other products and services, you will get support from the government. For example, at the time of the coronavirus pandemic, small businesses got forgivable loans.
On the other hand, during the depression, no one knew what would happen as it was a rare phenomenon, and the duration was also long. The government may likely support initially, but people would mostly be on their own later. If there is another depression at par with the Great Depression, it may dramatically change your life. The stock market would collapse, and unemployment could hit as high as 25%.
At the time of the Great Depression, there were several banking failures, and thus, people withdrew their money. This time, however, if there is a depression, people should not worry about their money in the bank. All your savings, deposits, and checking are 100% insured by FDIC (Federal Deposit Insurance Corporation). It means that as long as you follow all rules, your money is safe, and you get interested in it.
Is the U.S. on the Brink of Another Depression?
The U.S. is presently experiencing a recession due to the coronavirus pandemic. However, financial experts believe that the country won’t likely see another depression. It is because central banks and the authorities are alert and are taking all preventive measures. Interest rates are low, and banks have sufficient capital as well.
Moreover, the administration is using expansionary fiscal policy to ensure liquidity in the economy. Americans have been provided $1,200 stimulus checks, as well as more in unemployment benefits under the CARES Act. Several small businesses got forgivable loans as well. The administration is also considering another stimulus package.
Even though we have listed the differences between recession vs. depression, the truth is there is no standard definition of both recession and depression. Or, there are no clear distinctions between the two at the initial stage. Because the representative factors remain the same, it is the duration and severity of the situation that separates the two.