Recession vs. Depression: What’s the Difference?

A recession is a slowdown or contraction of an entire economy over the course of several months. Recessions are a normal part of the business cycle and can occur for numerous reasons; sometimes, there is a singular cause, like a war, widespread disease, or the bursting of an asset bubble (this happened in 2007 with the housing market). However, most recessions occur due to a complex combination of factors, including high interest rates, low consumer confidence, and stagnant wages or reduced real income in the labor market. Economists determine whether an economy is in recession by looking for indicators like rising unemployment, bankruptcies, and foreclosures; falling consumer spending and confidence; and falling asset prices.

An economic depression is a years-long recession that leads to a significant decline in the real gross domestic product (real GDP)—at least ten percent in a single year. In addition to economic contraction, depressions involve high unemployment rates, low inflation, stalled international trade, and decreased industrial production.

The difference between a recession and a depression primarily comes down to severity. While there’s no set definition, depression can be thought of as a severe recession that lasts for an extraordinarily long time—years, rather than months or quarters. The Great Depression, for instance, ran from 1929 until the beginning of World War II. By comparison, the Great Recession of 2007 to 2009 lasted eighteen months.

There has only been one economic depression in US history, known as the Great Depression of the 1930s. The Great Depression was triggered by a stock-market crash in 1929. During the stock market boom of the years prior to the crash, increasing numbers of investors had purchased securities on margin (by borrowing money from brokerages); when stock prices plummeted and investors were unable to meet their margin calls, brokers liquidated their portfolios, sending stock prices even lower.

Following the crash, the US economy experienced widespread bank failures and an uptick in bankruptcies and defaults that exacerbated the financial crisis. Initially, the Federal Reserve continued to raise interest rates to protect the gold standard rather than pump money into the economy to fuel consumer spending and economic growth. In an effort to repair the US economy, President Franklin D. Roosevelt established the Federal Deposit Insurance Corporation (FDIC) in 1933 and enacted several monetary and fiscal policies that helped stabilize the economy and create GDP growth.

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