What’s the Difference Between a Recession and a Depression?

We have recently been hit by a bear market, which is when the stock market falls by 20% from its most recent highs. With bear markets come widespread pessimism combined with negative investor sentiment. Because we have had an extended bull market that lasted for over a decade, many younger investors don’t remember seeing a bear market before. 

With the negative sentiment we have seen with this bear market, questions about recessions and depressions are being asked. Let’s take a brief look at these two topics explaining the differences between them.

Recession vs. Depression

These two words spark fear in many investors, but the first thing that should be understood is that recessions are a natural part of the economic cycle. We have had a long runup over the past decade, and this has meant that some stocks and the economy as a whole have been overpriced, and there needs to be a correction and slowing to rebalance things. 

A recession refers to a downtrend in the economy, which can affect production and employment. This trend can lower the average household income and spending.

A depression has a much more severe impact. Depressions are characterized by more drastic and widespread unemployment combined with significant pauses in economic activity. 

A recession can also be more localized to a country or region, while depressions generally have a global reach to them. 

When Was the Last Recession and Depression?

The Great Recession which started with the housing crisis and credit crunch is the most recent true recession that the U.S. and much of the rest of the globe have seen (the COVID 19 recession was not considered a true recession). This recession was the longest seen by Americans since the end of World War II. It lasted from December 2007 until June 2009. 

During the Great Recession, the U.S. unemployment rate rose from 5% at its start to 9.5% at its end, peaking at 10% in late 2009. U.S. home prices fell on average 30% from their 2006 highs, and the S&P index fell 57% from its late 2007 peak, not reaching the same levels until 2013. The net worth of U.S. households fell by over 20% to $55 trillion.

The last depression seen by Americans was the Great Depression which lasted from 1929 to c. 1939. The main factors leading to this depression were:

  1. The 1929 stock crash reduced spending and investment
  2. There was a 1930s run on banks that reduced the pool of money available for loans
  3. The gold standard caused central banks to raise interest rates counteracting U.S.-foreign trade imbalances, which depressed investment in those countries
  4. The 1930 Smoot-Hawley Tariff imposed tariffs on many goods that reduced output and global trade

Notable Recessions

Since 1960 there have been nine recessions; a few more notable ones were the:

  • The 1973 Oil Crisis where OPEC quadrupled oil prices and the 1973-1974 stock market crash led to stagflation.
  • The Early 90s recession was due to Fed interest rate increases from 1986 to 1989, as well as an oil price hike due to the first gulf war with Iraq. 
  • The Early 2000’s recession ended the longest economic climb with the pop in the dot com bubble.
  • The COVID 19 recession was the shortest ever recession that was aided by the Fed moves to hold up the economy.

What’s the Average Length of a Recession (and Depression)?

The National Bureau of Economic Research has economic data from 1854 onward. Until 1919, there were 16 economic cycles (averaging four years and one month), with recessions lasting 22 months each. From 1919 to 1945, there were six economic cycles with an average of 18-month recessions. And from 1945 to 2001, 10 cycles with an average of 10-month recessions and 57-month expansions. This trend indicates that economic cycles are becoming less severe. 

We have fortunately had the one Great Depression, which lasted for ten years, only recovering with the industrial expansion of WWII.

(post authored by Stephen Masters)

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