Okay, things are nasty, and we know life is hard and getting harder. If you live in Latvia, Iceland or Ukraine, you’d have a hard time calling what is going down in your country a “recession,” but then, exactly what is a depression? The Great Depression of the 1930s had all the “really bad” hallmarks – years of contracting economics (from 1929 to 1933, there was a 33% GDP contraction, and from 1937 to 1938, the drop was 18.2%), massive unemployment (25%, but who knows exactly if you can compare their definition of “unemployment” with our current metrics), and a wiped out stock market.
We have an easier time defining a recession. About.com calls the garden variety definition one in which “a decline [occurs] in the Gross Domestic Product (GDP) for two or more consecutive quarters.” But as they point out, this single parameter description is not enough for true economists: “The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) provides a better way to find out if there is a recession is taking place. This committee determines the amount of business activity in the economy by looking at things like employment, industrial production, real income and wholesale-retail sales. They define a recession as the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out. When the business activity starts to rise again it is called an expansionary period. By this definition, the average recession lasts about a year.”
Great, under anybody’s definition we know we’ve passed the recession test, but if December of 2007 was the start of this one, we are about to break a record for the duration of post Great Depression downturns by more than a furlong. Does that longer period of damaged economics qualify as a true depression? Since depressions happen so rarely, there are no really clear standards by which to make an absolute determination, but there are a few factors that appear to be particularly relevant.
The first is most certainly duration. And if this downturn stays around for years, that alone may be enough, since the longest “recession” post-Depression was 17 months… but the economists also want a GDP fall of at least 10% - with a new report telling us that the economy had a 6.2% drop in the fourth quarter of 2008, it seems pretty clear that the 10% number is just around the corner (guestimates would suggest that the last quarter of 2008 and the first quarter of 2009 could easily combine to exceed this level fall). The worst post-Depression GDP drop was only 4.9% - in the early to mid-1970s.
Experts need to see a market collapse as well, but with the Dow falling to well below half of a high experienced in 2007 and showing no signs of life anytime soon, we seem to meet that requirement in style.
Finally, there is unemployment. Economists add the requirement of a reasonably sustained period of significant joblessness – over 10%. We’re likely to hit pretty close to 8% in a couple of days, but even at the January numbers, 7.6%, the official “unemployment rate,” the government has its “alternative measurement” based on adding the official unemployment rate to a statically-generated sampling of (i) those who are only able to get part-time or occasional work (but want full time) and (ii) those who want jobs but have given up looking. That alternative measurement tends to be about 1.86 times greater than the naked unemployment rate. At 7.6% official unemployment, we are at least over 14.1% in the alternative measurement, and if you happen to live in a state that already meets the 10% requirement (like California), the alternative measurement is around 18.6%!
By my estimates, we are in a clear transition from recession to depression, a standard that will become even more clearly established if this downturn stays at or below current levels well into 2010 or if the GDP collapses into a free fall in the next quarter or two. But remember, “depression” is just a word… and not all depressions are considered equal. It’s like the difference between a mild cold (mild recession), a bad cold (recession), the flu (a longer, feverish illness which is a depression) and pneumonia (a Depression).
We’re sick, and our very hospitals may not even be there to take care of us! The March 3rd LA Times: “The economic decline is continuing to ravage the nation's hospitals, with half of them operating in the red and many planning service and staffing cuts.” Okay, I don’t feel any better either, but at least we all can agree that whatever this monster is, well, it’s absolutely horrific.
I’m Peter Dekom, and I approve this message.
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