According to the National Bureau of Economic Analysis, the Great Depression was a combination of two recessions. The first lasted for 43 months, from August 1929 to March 1933. The next lasted 13 months, from May 1937 to June 1938. The severe downturn lasted for about 10 years combined. There have been 34 recessions since 1854. Recessions have lasted for approximately 10 months on average since 1945.
Signs of a Recession
There are five indicators that economists can use to determine whether or not the economy is in a recession.
Negative real Gross Domestic Product (GDP) for two or more quarters can indicate a recession. A decline in consumer’s real income can indicate a recession, since consumer purchasing power will also decline. The strength of the manufacturing sector, and whether there is a trade surplus or deficit, helps economists determine whether the economy is self-sufficient. Inflation-adjusted retail and wholesale sales of products and goods can show economists whether there is a recession. A high unemployment rate, which would be about six percent or higher, indicates that the economy has already entered a recession.
Recession vs. Depression
Gross domestic product (GDP) contracts for at least a few months in a recession. GDP growth will slow for several quarters before it turns negative in a typical recession. There’s also a drop in four other critical economic indicators: income, employment, manufacturing, and retail sales. These reports come out each month, while the GDP is released quarterly, so they can signal a recession before the GDP turns negative. A depression is longer and more destructive than a recession. The economic contraction from a depression lasts for years, not quarters. GDP was negative for six out of the 10 years during the Great Depression. It shrank by a record of 12.9% in 1932, unemployment reached nearly 25% in 1933, and prices dropped for four years in a row in the 1930s. The devastation of a depression is so great that the effects of the Great Depression lasted for decades after it ended. The stock market didn’t recover until 1954.
Causes of a Recession
Causes of a recession include:
Loss of confidence in investment and the economyHigh interest ratesA stock market crashFalling housing prices and salesManufacturing orders slow downDeregulationPoor managementWage-price controlsPost-war slowdownsCredit crunchesAsset bubbles burstDeflation
Consumers will stop buying and businesses will lay off workers when there’s no confidence in the future. These situations create a downward spiral of unemployment, loan defaults, and bankruptcies. A shock often triggers this type of panic reaction, such as a stock market crash, wage-price controls, the collapse of an asset bubble, or an unanticipated reaction to government action, such as deregulation or an increase in interest rates. It’s business behavior at other times, such as poor management or credit crunches. It was a pandemic in 2020. A crash can scare consumers, who then buy less, and this triggers a recession. The crash restricts financing for new businesses. The sale of stocks provides them with the funds they need to grow. The stock market will continue to fall if confidence isn’t restored, and the extreme loss of confidence may also trigger a recession.
Causes of the Great Depression
There are many theories about what caused the Great Depression. Some common theories include the speculation and buying on margin that led to the stock market crash of 1929, the Smoot-Hawley tariff and the resulting freeze in international trade, the Fed raising interest rates, and the gold standard, which led nervous investors to trade their dollars in for gold.
Bottom Line
Your life would change dramatically if the United States were to experience an economic downturn on the scale of the Great Depression. One out of four people would lose their jobs. The stock market would drop by 50%, and it would take decades, not months, to recover.
COVID-19
The COVID-19 pandemic caused a recession, but not a depression. Unlike the early years of the Great Depression, Congress used expansionary fiscal policy to assist Americans. The CARES Act sent a $1,200 stimulus check to eligible adults earning up to $75,000. It also expanded unemployment benefits.
