Difference between a Correction, Recession and Depression

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In many of my analysis, I reference correction and recessions loosely. My definition of correction is a 10-15% market downturn vs. recessions are larger.

But at the end of that spectrum, there are also depressions and that’s when I started to become confused when should I constitute a downturn as a correction, recession and depression.

In Summary:

  • Correction: occurs when the value of a key benchmark stock index, such as the S&P 500, falls by 10% or more
  • Recessions: occurs when economies suffer sustained losses for months or years. This is defined by significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales
  • Depression: is a deep and long-lasting recession. There’s no clear guideline of how many years or quantitative measurements that breaks out the difference between a correction and recession. Therefore, in my analysis, I will not include the terminology “depressions” when breaking out periods of economic downturn.

Recession Indicators:

  • Loss of confidence in investment and the economy
  • High interest rates
  • A stock market crash
  • Falling housing prices and sales
  • Manufacturing orders slow down
  • Deregulation
  • Poor management
  • Wage-price controls
  • Post-war slowdowns
  • Credit crunches
  • Asset bubbles burst
  • Deflation

Each recession is different from the next. For example, no one could have predicted the Covid March 20′ downturn since it was the first time the global economy had a downturn due to a pandemic.

If you’re interesting in learning about the recessions throughout the last 100 years in the S&P 500, read this article: From Peak to Valley: Historical S&P 500 Recessions

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