A recession is a widespread economic decline that typically lasts between two months and 18 months. A depression is a more severe decline that lasts for years. The most famous depression in U.S. history was the Great Depression, which lasted for a decade.
Signs of Recession
There are five indicators that economic analysts can use to determine whether the economy is in a recession. Negative real GDP for two consecutive quarters or more can indicate a recession. A decline in real consumer income can point to a recession, as consumer purchasing power will also decrease. The strength of the manufacturing sector and whether there is a trade surplus or deficit helps determine if the economy is self-sufficient. Adjusted retail and wholesale sales for inflation of products and goods can show whether a recession is occurring. A high unemployment rate, which is around six percent or more, indicates that the economy may have already entered a recession.
Recession vs. Depression
The GDP contracts for at least a few months in a recession. GDP growth will slow for several quarters before turning negative in a typical recession. There is also a decline in four other critical economic indicators: income, employment, manufacturing, and retail sales. These reports are published monthly, while GDP is published quarterly, so they can indicate a recession before GDP turns negative.
A depression is longer and more destructive than a recession. The economic contraction caused by a depression lasts for years, not quarters. During the Great Depression, GDP was negative for six out of ten years. It fell by 12.9% in 1932, unemployment reached nearly 25% in 1933, and prices decreased for four consecutive years in the 1930s.
Causes of Recession
The causes of a recession include:
- Loss of confidence in investment and the economy
- High interest rates
- Stock market crash
- Declining housing prices and sales
- Slowdown in manufacturing orders
- Economic regulation
- Mismanagement
- Wage and price controls
- Post-war slowdown
- Credit collapse
- Asset bubble burst
- Deflation
Consumers will stop buying, and business owners will lay off workers when there is no confidence in the future. These situations lead to a downward spiral of unemployment, defaults, and bankruptcies.
It is often an economic collapse that triggers this type of feedback loop, such as a stock market crash, wage and price controls, an asset bubble burst, or an unexpected reaction to government actions, like regulation or rising interest rates. Sometimes, business behavior is the cause, such as mismanagement or credit collapses. In 2020, the pandemic was the cause.
Causes of Depression
There are several theories about what caused the depression. Some common theories include speculation and margin buying that led to the stock market crash of 1929, the Smoot-Hawley Tariff and the resulting trade freeze, rising interest rates by the Federal Reserve, and the gold standard, which drove nervous investors to trade their dollars for gold.
Conclusion
Your life would change dramatically if the United States experienced an economic contraction on the scale of the Great Depression. One in four people would lose their jobs. Stock markets would drop by 50%, and it would take decades, not months, to recover.
COVID-19
The COVID-19 pandemic caused a recession but not a depression. Unlike the early years of the Great Depression, Congress used expansionary fiscal policy to help Americans. The CARES Act sent a $1,200 check to eligible adults earning up to $75,000. It also expanded unemployment benefits.
Frequently Asked Questions (FAQs)
What are the causes of a recession?
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.
How much
How long does a recession last before it turns into a depression?
A recession lasts an average of ten months in the United States, typically ranging from two months to 18 months. A depression lasts for several years. The Great Depression lasted for ten years, while the depression that followed the Panic of 1837 lasted for six years.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
Capital Group. “Guide to Recessions: 9 Key Things You Need To Know.”
National Bureau of Economic Research. “U.S. Business Cycle Expansions and Contractions.”
Corporate Finance Institute. “Recession.”
The National Bureau of Economic Research. “The NBER’s Business Cycle Dating Procedure: Frequently Asked Questions.”
Federal Reserve Bank of Minneapolis. “Consumer Price Index, 1913-.”
Bureau of Economic Analysis. “National Income and Product Accounts Tables: Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product.”
Franklin D. Roosevelt Library and Museum. “Great Depression Facts.”
S&P Dow Jones Indices. “DJIA Daily Performance History,” Download “DJIA Daily Performance History.”
Federal Reserve History. “Garn-St Germain Depository Institutions Act of 1982.”
Federal Reserve History. “Recession of 1981–82.”
FDIC Banking Review. “The Cost of the Savings and Loan Crisis: Truth and Consequences,” Page 1.
Federal Reserve Bank of St. Louis. “What Caused the Great Depression?”
History.com. “5 Causes of the Great Depression.”
U.S. Congress. “H.R. 748 – CARES Act.”
Harvard Business School. “1837: The Hard Times.”
Source: https://www.thebalancemoney.com/recession-vs-depression-definition-causes-and-stats-3306048
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