What is the technical definition of ?depression??

by Constantine von Hoffman on November 20, 2008

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A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.

“People have begun to feel like a Christian Scientist with appendicitis.” — Tom Lehrer

It is difficult to believe but earlier this year people were still debating whether or not we were in a recession. The debate broke down along the lines of, ?We haven?t met the technical definition of a recession? vs. ?If it smells, like a duck, quacks like a duck and looks like a duck then it?s a duck.?

One of the reasons for the debate was because there are so many different definitions of a recession.

The standard definition used by idiots and journalists (like me!) is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.

Idiots and economists (like them!) don?t like this because it leaves out the unemployment rate and consumer confidence as indicators. ?By using quarterly data this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected.? Sadly, that?s not going to be an issue this time around.

National Bureau of Economic Research (NBER) says a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales.” A recession runs from when business activity has reached its peak and starts to fall until business activity has bottomed out. When business activity picks up again is called an expansionary period. I like this definition because it would let us say that a depression is the period from the end of the recession until the start of the expansionary period. If there?s no gap between the two then there?s no depression.

Like so many other things that we take for granted today, the ?recession? idea was invented as a response to the Great Depression. Before then any economic downturn was called a depression. Then the tsunami hit and economists realized they needed to differentiate between it and something that?s just a big wave.

So there really is no technical definition for a depression. One guide that?s been offered is that a depression is any economic downturn where real GDP declines by more than 10 percent.  While useful this does create some difficulties for the academic types who mess with nomenclature. Consider the US GDP from 1930 to 1933:

So we were in a recession for all but one of those years? Personally, I would have called that duck as I saw it. Are we in a depression now? You can answer that for yourself by applying this complex economic formula I learned from a t-shirt: “Why am I in this handbasket and where is it going?”

PS: Now that the extension of unemployment benefits has passed the Senate expect to see a sharp increase in the unemployment rate — which only counts people who are collecting unemployment insurance. You are no longer officially counted as unemployed if you are not collecting insurance. A lot of people who used up their benefits but aren’t employed will now re-appear magically on the roles. They will just as magically disappear in seven weeks when their benefits are used up and the rate will go down again. However, those people won’t be any more employed.

PPS: The talking heads are now nattering about deflation. Allow me to say, you read it here first.

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