Saturday , 28 May 2022

Recessions vs. Depressions: How Do They Differ?

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Normal business and economic cycles are characterized by growth in the economy (termed expansions), followed by periodic declines (called recessions) and, if a recession lasts 2 or more years, it is referred to as an economic depression….

  • Expansions tend to occur slowly over 5-10 years…
  • Recessions are quick and last for a few months to over a year.
Business cycle peaks and troughs

…A recession is 2 consecutive quarters of negative gross domestic product (GDP) growth [while]…an economic depression is a recession lasting 2 or more years…

The National Bureau of Economic Research (NBER) defines the time period of the recession as starting in the month where the economy peaked, then ending in the month that the economy bottomed. In other words, the recession begins right at the top of the peak and ends at the bottom of the trough, just as the economy starts growing again.

When the start of a recession is officially announced by the NBER, the economy has already been in a recession for 6 to 12 months….because it’s impossible to say when the economy reached a peak until many months after it happened. It takes time to see whether a decline is just a temporary reduction in growth or an actual recession.

Usually, the stock market and economy have started to decline long before the recession gets announced. Conversely, they are also well on their way to recovery when the NBER calls the end of the recession.

Bull Markets & Bear Markets

Bull markets and bear markets are terms used for the stock market:

  • A bear market is when stock prices have declined by 20% or more from the previous peak.
  • Bear markets can technically happen independently of recessions.

The stock market:

  • has historically declined significantly during a recession and then gone up significantly during the recovery and expansion. That makes total sense because corporate earnings tend to follow the economy.
  • The stock market is also forward-looking, so the market often starts going down before the recession starts. It may also start going up before the recession ends. For example,
    • the stock market reached a peak in October 2007, two months before the Great Recession started, and 14 months before it was announced and, conversely, the stock market bottomed and started going up again in March 2009, three months before the Great Recession ended, and 16 months before the end of the recession was announced.
Editor’s Note:  The original article by Kris Gunnars has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy.  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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