Earning

What an economic depression is, and how it's different than a typical recession

Twenty/20

The U.S. economy is likely headed for a recession as a result of the shutdowns caused by the coronavirus outbreak. But experts on Wall Street aren't sure what follows: The economy could see a disruption that's akin to a "major snowstorm" or a "bad recession," some say, while others worry about "job losses of depression magnitude" or even that America is on the "verge of a depression."

The fact is, no one yet knows the extent of the health and economic damage this pandemic will have, both at home and around the rest of the world. Still, many banks are now predicting the U.S. will fall into a recession — typically defined as two consecutive quarters of declines in gross domestic product (GDP), which is the sum of the value of all goods and services produced in an economy.

A depression is an even more severe economic downturn. The difference between a recession and a depression comes down to the depth and duration of such declines and whether there's deflation, meaning a general decline in prices.

Here's what you need to know about these economic contractions.

What's the difference between a recession and a depression?

Economists have standard definitions for what constitutes a recession. But there's there is no agreed-upon definition of a depression. Instead, as the Federal Reserve Bank of San Francisco puts it, a depression is commonly defined as a more severe version of a recession.

VIDEO2:5702:57
How to recession-proof your finances

Video by Jason Armesto

During a recession, there's commonly a rapid spike in unemployment as companies reduce headcount. Even workers who remain employed could see pay cuts or a reduction in the number of hours they work as businesses looks to cut costs. Some companies may go out of business altogether.

In the past 100 years, there have been 18 recessions, each lasting anywhere from six months to about 3.5 years, according to figures from the National Bureau of Economic Research. Here's how past recessions stack up, in terms of their length and peak unemployment rate.

Beyond the depth and duration of the downturn, deflation also is a key difference between a recession and a depression. Deflation occurs when prices in the economy are generally decreasing — it's the opposite of what normally occurs: inflation. During the Great Recession of 2007 to 2009, consumer prices fell as much 2.1% compared with the prior year, over a span of several months, but these declines were relatively brief.

The last depression was also the U.S.' most famous one: There was a 43-month downturn between 1929 and 1933, along with three other recessions in that 1920s decade, and combined that era is known as the Great Depression. During the longest of those recessions, the unemployment rate rose to nearly 25% and there was persistent deflation that exceeded 10% for more than three of those years.

There was an even longer economic contraction in U.S. history in the 1800s: A more-than five-year downturn termed the Long Depression of 1873 to 1879.

So is the U.S. headed for a depression?

Any predictions about an impending depression need to be taken with a grain of salt. That's because there's a different level of unpredictability related to a pandemic compared with other causes of prior economic recessions.

VIDEO3:0303:03
How do economic cycles work?

Video by Courtney Stith

One of the primary reasons that people are suggesting a depression might be possible is because of job losses. In just two weeks, a record-breaking nearly 10 million Americans filed for unemployment benefits. That's equivalent to about 6.5% of the nonfarm workforce. 

The unemployment rate rose to 4.4% in March, and one model from the Federal Reserve Bank of St. Louis suggests this rate could go as high as 32%. These economists estimate 47 million could lose their jobs over the course of the pandemic. They also caution, though, that the downturn could be brief compared with prior ones. And some experts say the ability of small businesses to hang on will determine how healthy the economy will be and quickly it will recover, as cases decline and states lift stay-at-home orders.

The duration of the downturn is more difficult to predict. Ben Bernanke, the former Federal Reserve chairman who served before and after the 2008 financial crisis, told CNBC recently that the economic slowdown is more similar to a "major snowstorm" than an economic depression.

"This is a very different animal than the Great Depression," Bernanke said, adding that particular downturn "was caused by monetary and financial shocks that hit the system."

How to handle your finances during a crisis

While an economic recession appears to be more likely at this point, there's not much use in stressing about whether the extent of the declines will qualify as a depression. Instead, take steps to shore up your finances now.

VIDEO4:1104:11
What to do if you can't pay rent because of coronavirus

Video by David Fang

Finally, experts say that "this crisis is going to create new jobs." And even with the grim warnings about the economy, many industries are hiring and hundreds of thousands of front-line positions are currently open.

And remember that while these types of economic slowdowns are scary and painful, they do have an ending. Of those 17 recessions in the past 100 years, more than half have lasted less than one year, and the periods of economic expansion have lasted much longer, clocking in at an average of more than four years.

More from Grow: 

acorns+cnbcacorns cnbc

Join Acorns

GET STARTED

About Us

Learn More

Follow Us

All investments involve risk, including loss of principal. The contents presented herein are provided for general investment education and informational purposes only and do not constitute an offer to sell or a solicitation to buy any specific securities or engage in any particular investment strategy. Acorns is not engaged in rendering any tax, legal, or accounting advice. Please consult with a qualified professional for this type of advice.

Any references to past performance, regarding financial markets or otherwise, do not indicate or guarantee future results. Forward-looking statements, including without limitations investment outcomes and projections, are hypothetical and educational in nature. The results of any hypothetical projections can and may differ from actual investment results had the strategies been deployed in actual securities accounts. It is not possible to invest directly in an index.

Advisory services offered by Acorns Advisers, LLC (“Acorns Advisers”), an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Brokerage and custody services are provided to clients of Acorns Advisers by Acorns Securities, LLC (“Acorns Securities”), a broker-dealer registered with the SEC and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Acorns Pay, LLC (“Acorns Pay”) manages Acorns’s demand deposit and other banking products in partnership with Lincoln Savings Bank, a bank chartered under the laws of Iowa and member FDIC. Acorns Advisers, Acorns Securities, and Acorns Pay are subsidiaries of Acorns Grow Incorporated (collectively “Acorns”). “Acorns,” the Acorns logo and “Invest the Change” are registered trademarks of Acorns Grow Incorporated. Copyright © 2019 Acorns and/or its affiliates.

NBCUniversal and Comcast Ventures are investors in Acorns Grow Incorporated.