Recession? Or Depression?

It seems self-evident, and most economists agree, that this Covid-19 crisis is going to result in negative GDP growth in the US and worldwide. You can’t shut down large segments of the economy and issue stay at home orders without economic repercussions. Economic forecasts I have seen have ranged from negative 8% down to negative 30% GDP growth year over year from 2Q 2019 to 2Q 2020. The bulk of the forecasts are in the negative low-teens. Let that set in for a bit.


The most common definition for a Recession is two consecutive quarters of negative GDP. Common, but not universal, as the US National Bureau of Economic Research does not fully accept the two-quarters definition. Nevertheless, for our purposes, let’s accept it. Will we have 2 quarters of negative GDP? We’ll see about Q1 2020 soon enough. Will the March air-brake halt reflect quickly enough to cause negative GDP for the entire quarter? It seems very possible to me. Assuming the Covid-19 infections flatten out and the government sounds the All Clear to continue “business as usual”, will the comeback be steep enough to pull the entire 2nd Quarter out of the nosedive and back to positive? I doubt it. What about 3Q 2020? That entails thinking about economic activity through the end of September. I think it depends on how quickly that All Clear is sounded. It isn’t looking likely to me that we will have positive GDP in the 3rd quarter, although the 2nd quarter may be so bad that any positive reading in the 3rd quarter would be a low bar to clear. My conclusion: A Recession in the standard 2 quarters definition is likely, and a Recession in the more multi-factor definition of the National Bureau of Economic Research seems to be already baked in the pie.


The definition of Depression is more difficult to pin down. The most common definition is a Recession that lasts 2 to 3 or more years or a 10% decline in GDP. If current economic forecasts are correct and the US GDP declines by the low-teens, are we then in a Depression? Because it is “or” 10% decline and not “and” 10% decline? It seems not. The concept of a Depression implies negative GDP over a long period of time, not just a short sharp shock. Most current economic forecasts believe the economy will recover some time prior to the end of 2020. Of course, that implies that the Covid-19 risk is drastically reduced or even halted, which is a big unknown. Even though the negative 10% standard may be met, I believe most economists would still not call this a Depression because the recovery will be relatively quick. Investopedia moreover says there has been only 1 Depression in US history, that being the Great Depression of the 1930s.


On one hand, what difference does it make whether it is a Recession or a Depression? Whatever it is, it still sucks. True enough. However, we in the US have not had any type of downturn in 12 years, which is long enough that a whole generation has entered the workforce without ever having experienced anything like this. Looking at this downturn analytically and seeing how and why it meets certain definitions helps us all with some perspective on what we are currently experiencing. In so doing, it may help us understand what things might look like on the other side of this crisis. My conclusion: This is no picnic, but it probably isn’t as bad as our grandparents or great grandparents experienced during the 1930s. As you are sipping cheap wine during your self-quarantine, raise a toast to them for what they went through.

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