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


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.

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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.

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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.

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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.

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