A depression is a severe and prolonged downturn in economic activity that is more extreme than a recession. Depressions are characterized by significant declines in real gross domestic product (GDP), high unemployment, and a prolonged period of economic stagnation.
What Is a Depression?
A depression can be defined as a prolonged recession lasting three or more years or leading to a decline in real GDP of at least 10% in a given year. Depressions are rare compared to milder recessions but are marked by severe economic impacts.
The U.S. has undergone several recessions but experienced only one major depression, the Great Depression, from 1929 to 1941.
Key Takeaways
- Depressions involve dramatic and sustained economic downturns, including sharp falls in economic growth, employment, and production.
- A depression is marked by recession-like features but endures longer or results in more significant GDP decline.
- While the U.S. has seen many recessions, only one, the Great Depression, qualifies as a depression in modern history.
Indicators of Economic Depressions
Two primary factors define a depression:
- Dramatic fall in consumer confidence as people worry about job security, leading to decreased spending.
- Decline in investments as both businesses and individuals pull back from new ventures and stock purchases.
Economic symptoms of a depression include:
- Substantial increase in unemployment
- Reduction in available credit from banks
- Diminishing output and productivity
- Consistent negative GDP growth
- High incidence of bankruptcies and sovereign debt defaults
- Reduced trade and global commerce
- Falling currency values and bear markets in stocks
- Low to negative inflation (deflation)
- Increased savings rate among unaffected individuals
Depression vs. Recession
A recession is considered a normal part of the business cycle, typically defined as a decline in GDP for at least two consecutive quarters. By contrast, a depression is much longer and has grave short-term and long-term economic impacts. For instance, during the Great Depression, approximately 25% of the U.S. population was unemployed, excluding many farmers who lost their land.
Example of a Depression
The Great Depression stands as the most severe economic downturn in modern world history, beginning with the stock market crash on October 24, 1929, known as Black Thursday. It lasted for approximately a decade and caused widespread unemployment and poverty, with significant declines in wages, real estate prices, and overall economic output.
Prevention and Modern Countermeasures
- Fiscal Policy: Government spending on public works and direct financial support to households can offer relief during economic downturns.
- Monetary Policy: Central banks, like the Fed, use interest rate cuts and quantitative easing to manage economic stability and avert depressions.
- Expanded Consumer and Investor Protections: Regulations and institutions established post-Great Depression, such as the FDIC and SEC, contribute to economic resilience.
Conclusion: Preparing for Economic Downturns
While worrying about an impending depression may be unnecessary, individuals should continue preparing for economic fluctuations. Diversify investment portfolios and stay aware of economic indicators such as consumer confidence. Utilize fiscal and monetary tools judiciously to protect the economy and personal finances during challenging periods.
Staying informed and proactive can help cushion the impact of future economic downturns.
Related Terms: Recession, Consumer Confidence, Unemployment, Fiscal Policy, Monetary Policy, Expansionary Policy, Bear Market.
References
- Federal Reserve Bank of San Francisco. “What Is the Difference Between a Recession and a Depression?”
- Federal Reserve Bank of San Francisco. “Dr Econ: How Many Recessions Have Occurred in the U.S. Economy?”
- Federal Reserve History. “The Great Depression”.
- National Archives, Presidential Library and Museum: Franklin D. Roosevelt Library. “Great Depression Facts”.
- Federal Reserve History. “Stock Market Crash of 1929”.
- Federal Reserve Bank of St. Louis. “Employment and Unemployment in the 1930s”. Page 43.
- National Bureau of Economic Research. “The End of the Great Depression”.
- Federal Reserve Bank of St. Louis. “Changing the Rules: State Mortgage Foreclosure Moratoria During the Great Depression”. Page 570.
- Federal Deposit Insurance Corporation. “A Brief History of Deposit Insurance in the United States”. Page 1.
- U.S. Securities and Exchange Commission. “Mission”.
- Federal Reserve History. “Subprime Mortgage Crisis”.
- Federal Reserve History. “The Great Recession and Its Aftermath”.
- The Confidence Board. “US Consumer Confidence”.
- The Confidence Board. “US Consumer Confidence Declined in January”.
- Federal Reserve Board. “What Is the Difference Between Monetary Policy and Fiscal policy, and How are They Related?”
- Library of Congress. “Today in History - April 8: Works Progress Administration”.
- Federal Reserve Bank of St. Louis, FRED. “Dates of US recessions as inferred by GDP-based recession indicator”.
