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Update: What is a Depression?

By Anonymous

In early March it seemed like the "D" word was everywhere. That raised a question: What is a depression?

This is an update to that earlier post. Although there is no formal definition, most economists agree a depression is a prolonged slump with a 10% or more decline in real GDP.

In March 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 not considered a depression.

Some people argue the duration of the economic slump defines a depression - and the current recession is already 18 months old (through May). 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 probably still has a ways to go.

Here is a graph comparing the decline in real GDP for the current recession with other recessions since 1947. Depression is marked on the graph as -10%.

Click on graph for larger image in new window.
Q2 2009 is estimated at a -4.0% decline in real GDP (seasonally adjusted annual rate). This will push the cumulative decline (peak to trough) to about 4.2% from the peak of real GDP.

Note: Northern Trust is forecasting -3.6% real GDP (SAAR) in Q2, and Goldman Sachs is forecasting -3.0%. For the stress tests, the baseline scenario assumed -1.2% in Q2, and the "more adverse" scenarios assumed -4.3%.

Even though the current recession is already one of the worst since 1947, it is only about 42% of the way to a depression (assuming a weak Q2).

To reach a depression - assuming -4.0% in Q2 - the economy would have to decline at about a 5.8% annual rate each quarter for the next year.

Full post as published by Calculated Risk on June 10, 2009 (boomark / email).