Is There Going to Be an Economic Depression?

Economic stability concerns often lead to questions about potential downturns. Understanding the current economic climate involves examining historical patterns and assessing present-day indicators. This article defines an economic depression and compares current economic signals to past severe events. Various forecasts help form a comprehensive economic outlook.

Defining an Economic Depression

An economic depression represents a severe and prolonged decline in economic activity, far more intense and enduring than a typical recession. While a recession is commonly characterized by at least two consecutive quarters of negative gross domestic product (GDP) growth, a depression involves a much deeper and more widespread contraction. Economists often define a depression as an extreme recession lasting three or more years, or one that leads to a decline in real GDP of at least 10% in a single year.

Key features of a depression include massive job losses, with unemployment rates rising substantially, often exceeding 20% in historical instances. Such periods also see widespread bankruptcies among businesses and individuals, alongside a sharp contraction in credit availability. Prices for goods and services experience steep declines, a condition known as deflation, which can further discourage spending and investment.

A depression is marked by diminishing output and productivity across industries. Consumer and business confidence plummets, leading to reduced trade and commerce. Investment in new factories, products, and financial markets decreases substantially, creating a cycle of reduced demand and production. These factors contribute to a financial toll on households and businesses, making recovery lengthy.

Historical Economic Depressions

The Great Depression of the 1930s stands as the most significant economic depression in modern U.S. history. During the period between 1929 and 1933, the United States experienced a drastic economic contraction. Real GDP declined by approximately 30%, industrial production fell by nearly 47%, and the unemployment rate soared to more than 20%. This downturn persisted for a decade, with widespread joblessness and falling wages.

Prior to the Great Depression, the Panic of 1893 also marked a severe economic downturn, considered the most serious until the 1930s. This period saw a significant fall in output and disruption to normal economic activity. The panic contributed to a national unemployment rate that reached an estimated 20% in its first year, and in some states, unemployment rates rose above 25%.

During the Panic of 1893, over 600 banks and 15,000 businesses failed, wiping out savings and leading to widespread poverty. Gross National Product declined by 10% over four years, and consumer prices fell by 18% between 1893 and 1897, indicating significant deflation. These historical examples show the extreme nature of economic depressions.

Current Economic Indicators

Examining current economic indicators provides a snapshot of the nation’s financial health. Real gross domestic product (GDP) in the United States increased at an annual rate of 3.0% in the second quarter of 2025, which followed a 0.5% decrease in the first quarter of the year. While second-quarter growth marks a rebound, this strength is influenced by a sharp pullback in imports rather than robust underlying demand. Through the first half of 2025, the economy’s average growth rate stood at 1.25%, indicating a slower pace compared to the previous year.

The unemployment rate, a key measure of labor market health, ticked up to 4.2% in July 2025, a slight increase from 4.1% in June. This rate hovered around 4.1% since May 2024. Labor force participation also experienced a slight dip, moving from 62.6% in April to 62.2% in July. These figures suggest a softening in the labor market.

Regarding inflation, the Consumer Price Index (CPI) for all urban consumers increased by 0.2% on a seasonally adjusted basis in July 2025. Over the 12 months ending in July, the all-items index saw an increase of 2.7%. Core inflation, which excludes volatile food and energy prices, rose 3.1% over the same 12-month period. Energy prices specifically decreased by 1.1% in July and were down 1.6% year-over-year.

Consumer spending, a significant component of economic activity, rose by an annualized 1.4% in the second quarter of 2025. This represented an acceleration from the 0.5% increase seen in the first quarter. However, these growth rates remain below those observed in the same periods of 2024 and are lower than the historical average of 3.3%. The personal consumption expenditures (PCE) price index, another measure of inflation, increased by 2.1% in the second quarter.

In the housing market, privately-owned housing starts in July 2025 were at a seasonally adjusted annual rate of 1,428,000 units. This figure was up 5.2% from the revised June estimate and 12.9% higher than the rate in July 2024. Despite the increase in starts, building permits issued in July declined to 1,354,000 units, a 2.8% decrease from June. Homebuilder confidence remains weak, with the NAHB index at 32 in August.

Stock market performance shows resilience, with the S&P 500 index reaching a record close on August 27, 2025. The index had a value of 6,466.91 as of August 22, 2025. Interest rates, set by the Federal Reserve, show the Effective Federal Funds Rate at 4.33% as of August 26, 2025. The Federal Open Market Committee (FOMC) has maintained the target range for the federal funds rate at 4.25%-4.50% for five consecutive meetings.

Economic Forecasts

Economic institutions and analysts offer various outlooks regarding the future trajectory of the economy. The International Monetary Fund (IMF) projects global growth at 3.0% for 2025 and 3.1% for 2026. For the U.S. economy specifically, the IMF forecasts a growth rate of 1.9% in 2025, with an anticipated rise to 2.0% in 2026. While the IMF does not predict a U.S. recession in 2025, it notes that the probability has increased to 37%.

The World Bank has a more conservative outlook, having lowered its U.S. GDP growth forecast for 2025 to 1.4%. Their projections indicate a slight improvement to 1.6% growth for the U.S. in 2026. The World Bank highlights several downside risks to the global forecast:

• Escalating trade barriers.
• Persistent policy uncertainty.
• Rising geopolitical tensions.
• Increased incidence of extreme climate events.

Other economic analyses align with a more moderate growth expectation. An economist survey anticipates U.S. GDP growth of 1.4% in 2025 and 1.5% in 2026. Similarly, one analysis projects real GDP growth to slow to 0.9% year-over-year by the fourth quarter of 2025 and to decelerate to 1.5% for the full year. This analysis also places the probability of a recession within the next 12 months at 35%. While global inflation is expected to fall, the IMF anticipates U.S. inflation will remain above its target.