Economic depression

An economic depression is when economic activity in a particular area experiences a prolonged, dramatic slowdown. Economic depressions are uncommon occurrences, while recessions are less severe and more common economic slowdowns. Depressions have severe effects on societies that can last for years and decades. Economists usually identify economic depressions as happening either when an economic downturn lasts for three or more years or when real gross domestic product (GDP) declines at least 10 percent in one year. Economic depressions are different from recessions because they are more severe, and they last for a longer period. By the 2020s, the United States had experienced only one true depressionthe Great Depression of the 1930sin its history. Because of globalization and the interdependence of world economies, an economic depression in one part of the world can significantly affect economies in other parts of the world.

Background

Economies, particularly capitalist economies, function in cycles. Usually, economic activity can be tracked with a wave-like pattern showing high and low economic activity. It is usual for economic activity to increase and then decrease over time. This cyclical pattern is normal, and it is repeated again and again in different economies. When an economy is expanding, it is experiencing growth. When an economy is contracting, it is experiencing a recession. The exact causes of different aspects of the economic cycle are often debated by economists, but factors such as GDP, interest rates, employment rates, and consumer confidence all influence economic cycles.

It is normal for economies to experience economic downturns. Economists agree that economic cycles are the norm, and economies will not expand indefinitely. That means that periods of economic contraction, or recession, are normal. These periods can be difficult for people experiencing economic downturns. However, recessions are not the same thing as economic depressions. Economists do not believe that economic depressions are part of the normal, unavoidable economic cycle. Instead, they believe that economic depressions are abnormal occurrences. Nevertheless, economic depressions can happen for reasons—such as natural disasters—that are outside the powers of governments or people.

Overview

Economists track many different indicators and data to understand economic cycles. Usually, economists identify the economy as experiencing expansion or retraction after that trend has already started. For example, economists might understand that the US economy experienced a recession in the first three months of the year only after that first quarter ends because the data about spending and GDP is available only after the end of the quarter. In the same way, economists usually identify economic depressions well after they begin. Most economists identify these events after an economy has experienced contraction for three years or when real GDP declines at least 10 percent in a year.

Economic depressions happen for different reasons, but one factor that can significantly influence development of a depression is a drop in consumer confidence. Consumer confidence is the term that explains how optimistic or pessimistic people feel about the future of the economy. When consumer confidence is high, people generally spend more money. When people spend more money, they increase the demand for goods and services. This demand then increases buying of raw material and employment rates. Conversely, when consumer confidence is low, consumer spending usually is also low. This decreases the demand for goods and services, which will most likely cause an increase in unemployment. Although consumer confidence affects the economy, it is also influenced by other parts of the economy.

Economic depressions have far-reaching consequences in society. Consumer confidence and consumer spending are usually much lower during economic depressions. They also usually bring high unemployment rates and very low inflation, as high inflation tends to happen when the economy is expanding. An economy that is experiencing an economic depression often has very little available credit. Banks do not feel confident loaning out money to businesses or individuals who may not be able to repay it because of a decrease in demand and an increase in unemployment. Bankruptcies and home foreclosures are also more common during economic depressions. These increases usually happen for multiple reasons, including a lack of available credit, decreased demand for goods and services, and high unemployment. Output and productivity also generally decrease during an economic depression. Savings rates often increase during economic depressions for people who can afford to save their money.

In the twentieth and twenty-first centuries, economies around the world became more intertwined than ever. Today, an economic downturn in one country will most likely affect economies in other countries. Some effects of economic depressions can have worldwide consequences. For example, economic depressions sometimes cause sovereign debt defaults, which happen when countries fail to pay their debts. They can also cause currency values to plummet. Both these economic factors affect the country affected and other economies that do business with or hold the same currency as those countries. Stock markets are also usually affected by economic depressions. Changes in one region’s market can also affect markets around the world.

Economists disagree about what conditions end an economic depression. Some economists believe that the depression ends once economic activity begins to increase. Other economists believe that the depression ends only when the economy is back to normal levels of activity.

Economists believe that tracking economic data is important because it can help governments and individuals identify economic cycles and possible economic depressions. Some people believe that understanding economic information can help governments prevent economic depressions because they can use government spending to help increase consumer confidence, reduce unemployment, or take other steps. Some people disagree that governments are effective at preventing or resolving economic downturns.

The United States has various institutions that help track economic activity. The Conference Board (CB) is an economic think tank that tracks various pieces of economic data. Businesses of all different sizes track CB data and statistics to help them understand the current economic situation. The CB is headquartered in New York, but it has offices around the world. The CB is best known for its Consumer Confidence Index, which is a survey that tracks consumer confidence and spending. The National Bureau of Economic Research (NBER) is another important organization, and it is the organization that officially determines the economic cycles in the United States. The NBER is the organization that officially announces when the United States is in a recession or a depression. The NBER’s Business Cycle Dating Committee is the group in the organization that tracks the country’s economic cycles. It identifies the ups and downs in economic activity and dates when specific peaks and troughs happen. The organization tracks many elements of economic data—including manufacturing output, the unemployment rate, and personal income—to track the economic cycles.

Times of economic trouble have happened since humans began developing economic systems. Yet, economists believe that the United States has experienced only one true economic depression, the Great Depression. This economic depression happened in the 1930s in the United States, though it also greatly affected economies around the world. People in the United States felt the effects of the Great Depression for decades. While debate continues among economists as to the exact origins of the depression, most economists believe that the downturn began in the summer of 1929, when the United States entered a mild recession. The recession caused consumer confidence to fall. Spending slowed down in the United States, and manufacturing declined as a result. Even though consumer confidence and spending were decreasing, the stock market continued to rise. In October 1929, the stock market crashed, and millions of people lost all their wealth. The massive stock market crash caused consumer confidence to plummet further. The falling consumer confidence, in turn, also caused reduced demand, increased unemployment, and decreased productivity.

The Great Depression lasted with varying degrees of intensity for ten years in the United States. In 1933, at the lowest economic point of the Great Depression, roughly 15 million Americans were unemployed. The depression also caused nearly half the banks in the United States to shut down. The Great Depression also affected economies in other parts of the world. Economists disagree as to the exact reason, and even year, the Great Depression ended. Many economists believe that the government spending policies enacted by President Franklin D. Roosevelt, known as the New Deal, helped protect the United States from falling into a more severe economic depression and helped reduce the suffering of average Americans during the worst years of the Depression. Other conservative economists claim that the spending of the New Deal did little to help the US economy. Many economists agree that World War II (1939-1945) played a major role in ending the Great Depression, due to the increase of manufacturing leading up to and during the war.

The 2020 COVID-19 pandemic disrupted or altered many aspects of the global economy, so much so, that its impacts were still being felt in subsequent years. Although economic recovery followed soon afterwards, by mid-decade economic slowdowns were again being predicted. Persistent inflation, global political turbulence such as the ongoing war in Ukraine, the conflict between Israel and Hamas, and uncertainties brought by the contentious relationship between the United States and China have all contributed to this prognosis.

Economic downturns are part of historical business cycles, Even major economic disruptions, such as occurred in 2008 and 2020, were eventually reversed and showed the resiliency of global economic infrastructures. Although a severe economic depression on par with what occurred in the 1930s is not theoretically impossible, it would, nonetheless, require an extraordinary series of circumstances.

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