Economic Depression – Definition

There is no absolutely agreed definition to a depression. But I would define a depression as

  •  A deep and long-lasting period of negative economic growth, with output falling for at least 12 months and GDP falling by over 10%.

A depression means the economy experiences a significant fall in output, higher unemployment and disruption to normal economic activity. It is a deep and prolonged form of a recession (negative economic growth)

A mild recession, with a small fall in GDP (of say 1-3%) would not be considered a depression by economists. Though in everyday use, people may refer to the economic downturn as a depression.

Harry Truman gave a famous quip about the practical meaning of depression.

It’s a recession when your neighbor loses his job; it’s a depression when you lose your own.”

― Harry S. Truman

Features of a depression

A depression would involve:

  • Very high levels of unemployment (In the great depression, unemployment often rose to 20% or more)
  • Fall in real wages
  • Very low inflation and possibly deflation
  • Falls in asset prices, such as the stock market and house prices.
  • Significant fall in business and consumer confidence.
  • Liquidity trap – interest rates cut, but have little impact in boosting demand.

Examples of Depressions

US economy 1929-32


In the three years of 1929-32, the US economy fell by nearly 30%.

The economy rebounded in 193-36, but to many people, the economy still felt like it was in a depression because unemployment was so high.


2020 Covid Depression


This graph just shows Q1 of 2020, with a quarterly fall of 1.2% (which is equivalent to an annual fall of 4.8%).

Technically, this is not a depression yet. But, by the end of 2020, I am sure we will have seen a fall in GDP of at least 10% – if not 25%.

Was the Long Depression of 1873-1879 really a depression?

The long depression of 1873-79 saw falling prices and substantially reduced rate of economic growth. In the US GDP continued to rise, but this was mainly due to a substantial rise in population.

By the metric of GDP, it was not a depression.

Data on real GNP comes from The American Business Cycle by Robert Gordon. Population data taken from United States census estimates. Chart was generated using Google Charts. (public domain)

However, by the metric of GDP per capita – it was a depression – with the NBER stating the US experienced 65 consecutive months of falling real GDP per capita. Unemployment rose to an estimated 1 million and up to 25% unemployment around New York.

Related concept

  • Deflation. This involves a fall in the general price level and is very rare. But, when prices do fall it usually causes a big fall in spending.

Further reading on depressions

Tejvan Pettinger, Oxford, UK. 5 May 2020

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