Recession and depression are both terms for a contracting economy. The difference between a recession and a depression is the severity of the economic “bad news.” In both cases, the economy experiences declining production, higher unemployment, shrinking household earnings and flagging consumer demand.

In a recession, the financial toll on households and businesses is significant, but manageable. In a depression, it’s overwhelming.

While the standard “rule of thumb” defines a recession as two consecutive quarters of declining gross domestic product (GDP), the official formula for determining a recession considers many more factors than just GDP. Identifying a depression is more difficult because there is no standard formula.

“The definition of a depression is usually something like, ‘a very severe recession,’” says Scott Wolla, economic education officer at the Federal Reserve Bank of St. Louis. “Some economists say that the decrease in GDP needs to exceed 10 percent.”

Over the past 100 years, the United States has weathered at least 13 recessions, but thankfully only one economic calamity that qualified as a depression.

The U.S. government doesn’t decide when the economy has officially entered a recession. Since 1920, that responsibility has fallen to the National Bureau of Economic Research (NBER), an independent nonprofit organization.

“The NBER is an economic think tank with a very important role,” says Wolla. “It plays ‘referee’ and decides when recessions occur in the United States.”

The working definition of a recession, according to NBER, is “a significant decline in economic activity spread across the economy, lasting more than a few months.” While GDP is an important indicator of economic health, NBER economists also track changes in employment, income, sales and industrial production.

When taken together, all of those indicators point to an economy that’s either expanding or contracting. Historically, expansion is the default condition of the U.S. economy. While short-term economic contractions are common, economists start talking about recession when the economy suffers a significant contraction marked by the “three Ds”—it is deep, durable and diffuse.

“'Deep' speaks to the magnitude of the downturn, 'durable' speaks to the length of time and 'diffuse' means that it must be widespread across the economy,” says Wolla.

Unfortunately, NBER isn’t able to flag the moment that a recession begins. In fact, NBER will only identify a recession after it has ended and the economy has officially begun to expand again. On average, NBER says that it identifies recessions between four and 21 months after the fact.

Most recessions last about a year and result in moderate economic losses equivalent to 2 percent or less of GDP. But depending on the cause and conditions of the recession, the economic impact can be much more severe.

The U.S. economy experienced one of its sharpest drops in GDP right after World War II as the manufacturing sector transitioned from wartime production back to a consumer economy. In 1945, the GDP contracted by 11 percent, the worst decline since the Great Depression. Thankfully, unemployment remained low (1.9 percent) and the economy began expanding again just eight months later.

In 1973, oil and gasoline prices skyrocketed thanks to the OPEC oil embargo. Higher energy costs raised the price of goods and services across the economy (inflation). President Nixon tried to rein in inflation by instituting price and wage freezes, but that resulted in massive layoffs. The recession of 1973 to 1975 lasted 16 months, GDP shrank by 3.4 percent and the unemployment rate more than doubled from 4 percent to 8.8 percent.

But the worst recession in recent memory was the 18-month “Great Recession” of 2007 to 2009. Triggered by the collapse of the U.S. housing market and high consumer debt, the Great Recession resulted in a 5-percent decline in the GDP. At its peak in October 2009, the unemployment rate reached 10 percent.

The NBER does not have a separate formula for identifying a depression and there is no clear dividing line between a recession and a depression. Instead, economists usually reserve the term “depression” for a truly severe and long-lasting period of economic decline. The Great Depression is the clearest example of the massive difference in magnitude between a recession—even a bad one like the Great Recession—and a depression.

The first downturn of the Great Depression lasted from August 1929 to March 1933. During those 43 harrowing months, GDP shrank by 30 percent—six times worse than the Great Recession—and the unemployment rate topped 25 percent. Economic conditions were so bad that prices fell 10 percent (deflation), banks failed and millions lost their homes.

Before that, the worst depression in U.S. history was the so-called “Long Depression” from 1873 to 1879. During that 65-month ordeal—more than three times longer than the Great Recession—the once-booming railroad industry ran out of funding, sending the unemployment rate as high as 14 percent.

There’s another difference between recessions and depressions. When the NBER calculates the length of a recession, it marks the end of the recession as the moment in which the economy reaches its lowest point (the “trough”) and starts to expand again. When most economists talk about a depression, they include the entire period from the initial shock until the economy returns to some semblance of normalcy.

From 1960 to 2007, there were 122 recessions in 21 of the world’s most advanced economies, according to the International Monetary Fund. During that same time period, there were “only a handful” of economic contractions severe enough to qualify as a depression. The most recent depression struck Finland in 1991 after the collapse of the Soviet Union—its largest trade partner. The Finnish GDP fell 14 percent and unemployment rose to almost 20 percent.

While the economic future is always uncertain, central banks like the Federal Reserve have learned important lessons from cataclysmic events like the Great Depression.

“We’ve learned a lot about using fiscal and monetary policy tools to support the economy in times of economic crisis,” says Wolla. “While not perfect, these tools were used effectively to limit the economic fallout during the Great Recession and the COVID-19 Recession.”