Definition of depression

What is a depression?

Slump is a slang term for a sharp decline in business activity, trade, or market values. Slump is a very flexible term in the sense that it is used to describe both a short, sharp dip and a more gradual and prolonged period of low activity or value. There are market recessions, economic recessions, industry recessions, earnings recessions, and so on.

In economic terms, depression generally refers to the beginning of a recession. A recession is not officially declared until several months of declining activity have passed, so the months leading up to the declaration of a recession are simply described as a prolonged economic depression.

Key takeaways

  • A recession refers to a period of underperformance or inactivity in an economy, market, or industry.
  • The term depression is a metaphor taken from geology, and it is an inaccurate and subjective term.
  • Within an economy, recessions can be a precursor to an impending recession.
  • Stock market crashes result in lower stock prices and trading volumes, creating an opportunity for opponents and value investors to buy more.

Understanding Slump

The term depression is a metaphorical word that originally referred to a situation in which a land surface slides down an underlying slope, often into a body of water or a marshy area and generally forms a depression or is completely submerged. This metaphor is intended to describe a market situation where prices, economic activity, or macroeconomic performance decline in a way reminiscent of the way the earth collapses when a recession forms.

Industry downturns are common and widespread. The airline industry experiences frequent downturns caused by intense competition. In these cases, capacity on overlapping routes builds up to the point where multiple airlines lose money on most flights. This leads to further cost reduction to fill seats and eventually pushes stocks for the industry as a whole down.

Even specific commodities can experience declines. In 2014, the price of oil plummeted due to systematic oversupply from OPEC and shale oil production.

Business journalists and other non-experts prefer metaphorical terms, such as depression, when describing quantitative economic or financial information. To make their writing more engaging or entertaining, they add variety to their choice and use of words, although they can sometimes obscure the underlying meaning. In general, a recession is simply used as a general and inaccurate term to describe any period of poor performance or inactivity in an economy, market, or industry.

Because it has a somewhat negative connotation and does not have a precise technical definition, the use of the term depression can refer to practically any situation that the author or speaker wishes to frame in a negative way, making it an inherently subjective term. A commentator interested in trading bonds, for example, might refer to a drop in bond prices, although, from a lender’s point of view, lower bond prices could be perceived as a positive, as they also mean higher yields.

Housing market downturns can indicate a prolonged period of falling home values ​​in a market.

Market crashes, housing market crashes, and the Trump crash

The falls also apply to financial markets. When the stock market enters a recession, stock prices and trading volume are often lower. This can create investment opportunities for value investors and opponents, but investing should generally be done with a longer time frame in mind. Crashes in the stock market and the economy in general often go hand in hand, but this is not always the case. China’s stock market crashed in 2015 and spent the next several years in a recession even as the Chinese economy continued to grow.

Housing market declines are reported as widely as stock market declines. These are periods when home prices in a specific area or region see a slowdown in sales and a decline in average prices. As with economic recessions, housing market recessions can indicate a prolonged period of declines in home values ​​in a market.

One of the most unique uses of the word depression is Trump’s depression. Trump’s downfall referred to the decline in the number of international visitors and tourists to the United States during his tenure. On the other hand, Trump’s coup was a way of referring to the stock market rally that followed his election as president of the United States in November 2016.

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Mark Holland

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