What’s the Difference Between a Recession and a Depression?

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There’s not much of a technical difference. 

A recession is two consecutive quarters of economic contraction, or gross domestic product declining year-over-year (see our explainer on recessions). And a depression is simply a recession with the GDP decline both severely deep and lasting for a period of several years, rather than roughly 6 to 18 months. 

Here’s the point you need to be aware of right now as an investor: whatever the contraction will be for the recession we’ve likely just stepped into, you must watch where earnings are going for the next year, what earnings multiple stocks are trading at and where interest rates are. 

Those things will be dictated by economic output and inflation, but ultimately, investors care about the level and growth of cash flow companies can produce in the next year and into perpetuity. The longer the recession, the more profit growth will deteriorate until the economy recovers. 

For now, let’s dive into the difference between the Great Recession of 2008, Great Depression of the 1930’s and what to watch for now. 

The Great recession was long. It was 18 months, spanning from December 2007 to June 2009 and the total GDP decline globally for that period was 5.1%. That’s ugly, but not as ugly as the depression was. 

The Great Depression was a little over three and half years, spanning from August 1929 to March 1933. Global GDP declined 26.7% 

Two huge differences between then and now:

First off, the Federal Reserve now can pad the hard landing with monetary stimulus — and it is. It didn’t quite have that effect then. 

Secondly, banks are FDIC insured now. They weren’t then, which didn’t do any favors to stop people from running the banks and pulling their money. 

For the kicker on all of this, if you're a stock investor, watch the quick video above. 

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