Recession vs Depression: How Do These Economic Terms Compare?

“I wouldn’t necessarily give much credence to the fact that the inverted yield curve last year predicted what’s happening right now.” Since 1955, an inverted yield curve has predicted each recession, and it should be noted that the curve did invert in 2019. Ullrich warns that there were other economic forces abroad that caused the most recent inversion. There are many indicators experts use to predict when a recession may occur, and the most reliable is an inverted yield curve. There have been 50 recessions in history, from The Copper Panic of 1785 to the 2008 Great Recession. Most recently, the US experienced its 51st recession, a two-month recession in the early months of 2020 as a reaction to the onset of the pandemic.

Also, when markets are in panic mode, growth highfliers and even quality cash cows can sometimes become bargains worthy of a spot in your portfolio. Keep a wish list of stocks you’d like to add—if the price is right—and wait for your opportunity. Typically, people who completely exited stocks during a recession came to regret it. The 2008 and 2020 recession sell-offs were followed by long rallies that quickly brought major indexes back above pre-recession levels. Any long-term investor will likely face several economic recessions over decades of investing.

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. 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. Depressions may sound similar to recessions but tend to be much more severe.

  1. A recession can be global in scale, but it can also restrict the economies of smaller regions or just even individual countries.
  2. Instead, they are irregular in length, and their severity is reflected by the economic variables of the time.
  3. Social recessions can take a toll on our physical and mental health, and can weaken our social bonds and communities.

The economy was already trending downward over the summer before the crash, with unemployment rising and manufacturing declining, leaving stocks significantly overvalued. Then on October 24, known as “Black Thursday,” investors sold off almost 13 million shares of stock, signaling to consumers that they had been right about their lack of confidence. Spending came to a halt, debt increased, homes were foreclosed, and banks began failing. To help you better understand the business cycle 1 chf to jpy exchange rate and prepare for the twists and turns of an economic crisis, here’s what you need to know about recessions, depressions, and how they’re different. To be official, a recession has to include a downward trend in GDP characterized by a decline in production and employment, which in turn causes the incomes and spending of households to decline. These income and spending declines could lead to further declines in production and employment in a vicious cycle that morphs into a depression.

To combat the decline, the Federal Reserve may step in and change interest rates to jumpstart markets again by infusing them with cash. 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. While people often worry about economic depressions, they are much rarer than recessions.

How Does a Recession Differ from Depression?

Kat has expertise in insurance and student loans, and she holds certifications in student loan and financial education counseling. 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. Various measures have been put in place to prevent another depression from happening.

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But many of these factors are intertwined, meaning a significant drop in something like GDP could rattle consumer spending or unemployment. The impact of a severe recession can take years to overcome. As we learned from the Great Depression, entire generations of people with the bad luck to enter the workforce during such times may never make up the lost income opportunities. 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. As a result, money becomes scarce as wages drop and people spend less.

Signs of a Recession

So while those first few months in 2020 were officially labeled a recession, if you had worried about housing and food, that time may have felt more like a depression to you. The economy has cycles, and so recessions are usually predictable, says Lynnette Khalfani-Cox, CEO and a founder of, a financial education company. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. We believe everyone should be able to make financial decisions with confidence.

Unemployment is a major aspect of a recession. Learn more in our article on the difference between furlough vs. layoff.

But people do not turn to the dictionary for cheap puns and bad jokes (we hope); 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. Although they’re more or less a regular occurrence, and indicative of a cyclical business cycle, the duration, economic impact, and triggers of recessions can vary greatly. Between 1945 and 2001, there were only 10 recession cycles, which is far fewer than we had seen in similar periods of time in the past. Some economists use this as evidence that the business cycle has become less volatile.

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. A business cycle tracks the up-and-down fluctuations natural to any capitalistic economies. In fact, some economists believe they’re a natural part of an economic cycle that is characterized by peaks and troughs.

There are people whose entire careers are spent tracking and detecting the presence of recessions and depressions. These people look at a whole array of economic indicators — from the Bureau of Labor Statistics’ employment reports to the National Association of Home Builders’ number of new homes being built. 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.

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. Gross domestic product (GDP) contracts for at least a few months in a recession. GDP growth will slow for several quarters before it turns negative in a typical recession.

Research firm FactSet issues weekly reports forecasting quarterly earnings, so you can check there for trends. It also tracks company forecasts, noting how many companies have issued better or worse quarterly guidance. An “earnings recession” can often turn into a real-world recession, and sometimes serves as a canary in the coal mine. Although companies lay off workers even during boom times, the layoffs come much more often when corporate leaders start to feel squeezed.


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