By the classic measure, a ‘depression’ still seems far off
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The Calculated Risk blog takes on the question of how to define a depression.
From the blog:
‘It seems like the ‘D’ word is everywhere. And that raises a question: What is a depression? Although there is no formal definition, most economists agree it is a prolonged slump with a 10% or more decline in real GDP.’
We’re still a good distance from that 10% threshold, CR notes. Even assuming that gross domestic product falls at a mind-reeling 7% annualized rate in the current quarter, that would put it down 3.4% from the 2007 peak.
So ‘even though the current recession is already one of the worst since 1947, it is only about 1/3 of the way to a depression (assuming a terrible Q1),’ CR notes. ‘To reach a depression, the economy would have to decline at about a 6.6% annual rate each quarter for the next year.’
As for other potential depression yardsticks, CR says:
‘Yesterday I heard an analyst say that a 10% unemployment rate is a depression. But the unemployment rate peaked at 10.8% in 1982, and that period is usually not considered a depression. ‘Some people argue the duration of the economic slump defines a depression -- and the current recession is already 15 months old. That is longer than the recessions of ’90/’91 and ’01. ‘The ’73-’75 recession lasted 16 months peak to trough, and the early ’80s recession (a double dip) was classified as a 6-month recession followed by a 16-month recession (22 months total). Those earlier periods weren’t ‘depressions,’ so if duration is the key measure, the current recession still has a ways to go. ‘I still think a depression is very unlikely. More likely the economy will bottom later this year or at least the rate of economic decline will slow sharply. I also still believe that the eventual recovery will be very sluggish, and it will take some time to return to normal growth.’
Of course, for someone out of work and out of money, a formal definition is beside the point. It’s a depression for you, no matter what the economic data show.
-- Tom Petruno