Recession vs. Depression: It is not easy to differentiate between a recession and a depression, and there is no one definition that is accepted by everyone. Since the end of World War II, the National Bureau of Economic Research (NBER) has identified around twelve economic downturns, the most recent of which occurred in the early 2020s. To classify a recession, however, requires taking into consideration a number of different characteristics, and economic experts caution that there is space for interpretation.
There is not one single, definitive definition that can be used for either a recession or a depression, according to Gary Schlossberg, who is the lead wealth investment solutions analyst at Wells Fargo.
The phrases are open to interpretation, and even determining whether or not a recession is occurring may be difficult. It is essential to acknowledge that slumps in economic activity are complicated phenomena that are subject to the effect of a wide range of elements and that the categorization of these occurrences may shift significantly depending on the surrounding circumstances and the evaluation standards that are used.
What is the difference between a recession and a depression?
Distinguishing between a depression and a recession lacks a standard answer and can vary based on different perspectives, including that of the Federal Reserve Bank.
Economists commonly define a recession as a significant and sustained decline in economic activity that extends over several months. This decline is typically observed in various economic indicators such as real GDP, real income, employment, industrial production, and wholesale-retail sales. However, it is important to note that these criteria are not always rigidly applied.
For instance, in the early months of 2020, the National Bureau of Economic Research (NBER) declared a recession despite its duration being just two months, which is shorter than the commonly used criterion of two consecutive quarters of negative GDP growth. This decision was influenced by the depth and widespread impact of the economic slump during that period. Gary Schlossberg cautions against relying solely on such rule-of-thumb definitions, as exceptional circumstances can lead to deviations from the standard criteria.
In summary, while a recession is generally understood as a significant decline in economic activity, the exact thresholds and parameters for defining a recession versus a depression can be subjective and context-dependent.
When exactly does a downturn in the economy become a depression?
The majority of economic specialists agree that a recession transforms into a depression when the drop in GDP is more than 10%. On the other hand, Schlossberg said that this is yet another rule that may “easily be broken.”For example, the real gross domestic product (GDP) fell by 9.6% from its peak to its trough in 2020, which is close to the criterion of 10%. But Schlossberg said that the decrease was only temporary, so “nobody’s talking about the 2020 experience as a depression, even though we came awfully close.”
Is the economy going to go into a recession in 2023?
According to economists, the United States is not presently in a recession; nevertheless, many forecasters anticipate that this will change in the near future.
According to a study conducted in April by the National Association of Business Economics, slightly over half of economists working for firms and trade, organizations said that the likelihood of a recession occurring over the next 12 months was less than or equal to 50%. Forty-four percent of respondents believe there is a higher likelihood than even that there will be a decline.
According to Schlossberg, “The economy of the United States, we think, is so vulnerable to recession by the end of the year and extending into the early years of 2024.” On the other hand, “based on the known unknowns, I would say that the risk of an outright depression is relatively small.”