Was Last Quarter a Depression?

March 2, 2009

People are increasingly using the term “depression” especially to describe the economy last quarter and currently.  Contraction has been rapid for both jobs and GDP, and the downturn extends to most economies.  U.S. circumstances do not qualify yet but may before this event is over.

The unemployment rate remains more than a percentage point below the highest print in the 1970’s of 9.0% and about three percentage points below the highest rate in the 1980’s of 10.8%.  In the Great Depression, the jobless rate peaked at 24.9% and did not leave double digits until World War II.  New jobless claims, a proxy for the layoff rate, of 667K in the latest reported week constituted a record nominal high but still lies some 30% below the historic post-war peak if normalized to account for a bigger labor force.

U.S. real GDP would have fallen 6.2% if the fourth-quarter pace was replicated for three more quarters.  In the Great Depression, real GDP plunged 9.6% per annum in the three years between 1929 and 1932, an interval twelve times longer than the single quarter.  In calendar 1938, often called the recession within a depression, GDP declined 3.6%.  The table below compares annualized growth last quarter with per annum growth in the three years to 1932 and growth in 1938.  Major components of aggregate demand are also compared.

% per annum 4Q08 1930-32 1938
Real GDP -6.2% -9.6% -3.6%
Consumption -3.0% -5.8% -1.6%
Investment -3.3% -52.5% -34.8%
Government +0.3% +3.6% +7.3%
Exports -3.4% -18.7% -1.0%
Imports +3.0% -14.2% -22.3%


U.S. trade flows imploded much more sharply in the 1930’s than over the past year, but Germany, Japan, and trade-dependent emerging markets have reported drops in exports and imports like those of the United States in the Great Depression.  Investment is the other category that did far, far worse in the 1930’s than recently.  On the other hand, for all the knocks on Herbert Hoover’s espousal of laissez faire policymaking, government spending was downright generous in 1930-32 compared to last quarter.  In his lame-duck months, former President Bush pretty much called it in.  The flat-line for government expenditures casts the Republican criticism of Obama’s budget into a different light.  Yes, strategy has changed sharply.  But the comparison is between two extremes, not the old way and a new way.

Real GDP hasn’t yet recorded a peak-to-trough drop in the same league as seen in previous cycles that acquired the depression label.  In fact, the 1.7% decrease is still 1.2 percentage points less than the 2.9% peak to trough decline in the 1981-82 downturn, and nobody called that one a depression.  The downturn in 1973-5 also had a peak-to-trough drop of around 3%.  Thus far, this recession doesn’t meet depression standards, but it could certainly evolve into one.

Not every depression has to be as severe at the Great Depression.  The United States experienced four depressions plus one panic after the Civil War but before the turn of the twentieth century. There was also a depression after the First World War but before the Great Depression.  There’s a lot of room for discretion between a peak-to-trough decline of 3% and one of 30%.  Once 1Q09 data are released, this down-cycle will probably have an accrued drop of at least 3%.  Japan already has a cumulative slide of 4.8%, and some emerging markets also have already gone well past 3%.  Since no other down-cycle in the past 70 years has exceeded 3%, I would be inclined to put a different label on this one from “recession” if it eventually records a peak-to-trough reduction of more than 5.0%.  Whether “depression” is selected should depend upon how much greater than 5% is the drop and the eventual extremes for unemployment, industrial production and retail sales.  The quality of the ensuing expansion also ought to be considered in labeling this event appropriately.  If GDP fell only 3.5% from peak to trough but recorded no net advance over the ensuing 3 years, that too would transcend anything previously called a recession to such a degree as to deserve a wholly different characterization.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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