Depression Vs. Recession

March 23rd, 2020
March 23, 2020
Joseph Vecchio

Depressions and recessions differ both in duration and the severity of economic contraction.

A recession is a normal part of the business cycle that generally occurs when GDP contracts for at least two quarters. A depression, on the other hand, is an extreme fall in economic activity that lasts for years, rather than just several quarters. This makes recessions much more common: since 1854, there have been 33 recessions and just one depression.

Economists disagree on the duration of depressions.

Some believe a depression encompasses only the period plagued by declining economic activity. Other economists argue that the depression continues up until the point that most economic activity has returned to normal.

The Great Depression lasted roughly a decade and is widely considered to be the worst economic downturn in the history of the industrialized world. It began shortly after the Oct. 24, 1929, U.S. stock market crash known as Black Thursday. After years of reckless investing and speculation the stock market bubble burst.

The 1930s Great Depression lasted three and a half years, wiping out more than a quarter of U.S. GDP. In addition, unemployment during the Depression surpassed 24%.

The Great Depression was characterized by a drop in consumer spending and investment, and by catastrophic unemployment, poverty, hunger, and political unrest. In the U.S., unemployment climbed to nearly 25 percent in 1933, remaining in the double-digits until 1941, when it finally receded to 9.66 percent.

During the Great Depression, unemployment rose to 24.9 percent, wages slid 42 percent, real estate prices declined 25 percent, total U.S. economic output nearly halved to $55 billion and many investors’ portfolios became completely worthless.

Why a Repeat of the Great Depression is Unlikely

Policymakers appear to have learned their lesson from the Great Depression. New laws and regulations were introduced to prevent a repeat and central banks were forced to rethink how best to go about tackling economic stagnation.

Nowadays, central banks are quicker to react to inflation and are more willing to use expansionary monetary policy to lift the economy during difficult times. Using these tools helped to stop the great recession of the late 2000s from becoming a full-blown depression.

The 2007-2009 Great Recession lasted less than two years and the U.S. only experienced six quarters of negative GDP growth totaling just over 5% from its peak. The 2008 Recession also saw unemployment reach a high level of approximately 10%.

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