An economic depression is a severe and prolonged downturn in economic activity, featuring high unemployment and negative GDP growth. It is a period of sustained significant economic decline that sees a nations GDP drop, unemployment rates rise, and consumer confidence suffer. Economic depressions may be related to one or more national economies, and they may be characterized by their length or duration, showing increases in unemployment, larger increases in unemployment, or even abnormally large levels of unemployment.
The National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions. Generally, periods labeled depressions are marked by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced using current resources and technology.
Some key characteristics of an economic depression include:
- A severe and sustained downturn in economic activity, with symptoms including a sharp fall in economic growth, employment, and production.
- A decline in real GDP exceeding 10%, or a recession that lasts longer than three years or that results in a decline of at least 10% in annual GDP.
- A reduction in global commerce, lower manufacturing output, low inflation/possible deflation, less available credit from banks, and sovereign debt defaults.
- A huge decline in consumer confidence, meaning people are much less willing to spend money than they are during financially stable periods. Home sales and other large purchases plummet.
An economic depression is primarily caused by worsening consumer confidence that leads to a decrease in demand, eventually resulting in companies going out of business. When consumers stop buying products and paying for services, companies need to make budget cuts, including employing fewer workers.
