What is the Difference Between Recession and Depression?

The difference between recession and depression is something not even economists can agree on, as there are a number of ways to define depressions and recessions. Generally speaking, both are characterized by a period of economic uncertainty and a decline in economic activity. Recessions are less severe, with recovery usually happening within two years. Sometimes, it is difficult to tell if a period of economic turbulence is an economic recession or depression until after the fact.

A common rule of thumb used to define recessions is two sequential quarters where the gross domestic product (GDP) drops. Others consider a recession to be a period when business activity like placing orders for new products peaks and then bottoms out. A recession may be accompanied with rising unemployment and other issues creating less purchasing power for consumers and driving the economy down even further as people cannot afford to engage in commerce.

A depression is a period when the GDP drops by 10% or more, accompanied with issues like deflation, dramatic drops in the value of assets, and a credit crunch, where people and institutions cannot access credit to carry out their business. These issues can also appear during a recession, although they may not be as severe. Depressions can also drive up rates of bankruptcies, foreclosures, and other adverse credit events as people struggle to service debt. Recession and depression both create hardship, but one is much worse than the other.

Some economists argue that the difference between recession and depression can be seen in how personal the experience of financial hardship is. In depressions, people across social and class strata encounter hardships and everyone from multinational banks to small businesses has trouble getting credit and accessing capital. Everyone's assets fall in value and many people experience unemployment or know people who do. By contrast, in a recession, some people manage to maintain their wealth and some even build it.

Recession and depression can also be differentiated by length. Recessions tend to be shorter, as the economy recovers more quickly since not as much value is lost. Depressions can be long term, lasting a decade or more in total. Recession and depression can also be differentiated on the basis of changes in the market and business philosophies. Permanent shifts can also be seen during a depression. More people may give up on work entirely due to prolonged unemployment and businesses may adapt their practices in order to cater to people with decreased buying power. Depressions can be reflected in everything from changes in packaging sizes to difficulty paying down government debts.