Tuesday, March 10, 2009

What makes a depression a depression?

When is a depression a depression? When you stay in bed and cry into your pillow? When you throw beer bottles at "American Idol Rewind?" When you over-react because someone bumped into you? We've been hearing that word a lot lately in the news, and the Calculated Risk blog provides some interesting comparisons, including the GDP losses of the recessions of the 20th century as well as the Great Depression:

Although there is no formal definition, most economists agree it is a prolonged slump with a 10% or more decline in real GDP...

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...

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