There is no specific definition of a depression, just as there isn’t one for a recession. The National Bureau of Economic Research assigns the latter title months after a recession has occurred.
The National Bureau of Economic Research (NBER) confirmed on Monday that the United States officially entered a recession in February, bringing an end to the country’s longest expansion since World War II.
A recession is commonly defined as two consecutive quarters of negative gross domestic product, although the NBER can consider the severity of the downturn, how quickly it happens, and how much of the economy is affected.
Simply described, a recession and a depression are both times of severe economic activity reduction.
A depression, on the other hand, is on a “completely other scale,” according to Susan Houseman, research director at the W.E. Upjohn Institute for Employment Research. “It’s the first time we’ve seen something like it in 80 to 90 years,” she remarked.
Is the United States currently experiencing a depression?
According to new research from Boston University School of Public Health, the high rate of depression has continued into 2021, and has even deteriorated, rising to 32.8 percent and harming one in every three American citizens.
Is there going to be a recession in 2021?
Unfortunately, a worldwide economic recession in 2021 appears to be a foregone conclusion. The coronavirus has already wreaked havoc on businesses and economies around the world, and experts predict that the devastation will only get worse. Fortunately, there are ways to prepare for a downturn in the economy: live within your means.
A recession or a depression: which is worse?
That is an excellent question. Unfortunately, there isn’t a standard answer, however there is a well-known joke about the difference between the two that economists like to tell. But we’ll return to that eventually.
Let’s start with a definition of recession. As previously stated, there are various widely accepted definitions of arecession. Journalists, for example, frequently define a recession as two consecutive quarters of real (inflation adjusted) gross domestic product losses (GDP).
Economists have different definitions. Economists use the National Bureau of Economic Research’s (NBER) monthly business cycle peaks and troughs to identify periods of expansion and recession. Starting with the December 1854 trough, the NBER website tracks the peaks and troughs in economic activity. A recession, according to the website, is defined as:
A recession is a widespread drop in economic activity that lasts more than a few months and is manifested in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins when the economy reaches its peak of activity and concludes when it hits its lowest point. The economy is expanding between the trough and the peak. The natural state of the economy is expansion; most recessions are temporary, and they have been uncommon in recent decades.
While there is no universally accepted definition for depression, it is generally said to as a more severe form of recession. Gregory Mankiw (Mankiw 2003) distinguishes between the two in his popular intermediate macroeconomics textbook:
Real GDP declines on a regular basis, the most striking example being in the early 1930s. If the period is moderate, it is referred to as a recession; if it is more severe, it is referred to as a depression.
As Mankiw pointed out, the Great Depression was possibly the most famous economic slump in US (and world) history, spanning at least through the 1930s and into the early 1940s, a period that actually contains two severe economic downturns. Using NBER business cycle dates, the Great Depression’s first slump began in August 1929 and lasted 43 months, until March 1933, significantly longer than any other contraction in the twentieth century. The economy then expanded for 21 months, from March 1933 to May 1937, before experiencing another dip, this time for 13 months, from May 1937 to June 1938.
Examining the annual growth rates of real GDP from 1930 to 2006 is a quick way to highlight the differences in the severity of economic contractions associated with recessions (in chained year 2000dollars). The economy’s annual growth or decrease is depicted in Chart 1. The gray bars show recessions identified by the National Bureau of Economic Research. The Great Depression of the 1930s saw the two most severe contractions in output (excluding the post-World War II adjustment from 1945 to 1947).
In a lecture at Washington & Lee University on March 2, 2004, then-Governor and current Fed Chairman Ben Bernanke contrasted the severity of the Great Depression’s initial slump with the most severe post-World War II recession of 1973-1975. The distinctions are striking:
Between 1929 and 1933, when the Depression was at its worst, real output in the United States plummeted by over 30%. According to retroactive research, the unemployment rate grew from roughly 3% to nearly 25% during this time period, and many of those fortunate enough to have a job were only able to work part-time. For example, between 1973 and 1975, in what was likely the most severe post-World War II U.S. recession, real output declined 3.4 percent and the unemployment rate soared from around 4% to around 9%. A steep deflationprices fell at a rate of about 10% per year in the early 1930sas well as a plunging stock market, widespread bank failures, and a spate of defaults and bankruptcies by businesses and households were all aspects of the 1929-33 fall. After Franklin D. Roosevelt’s inauguration in March 1933, the economy recovered, but unemployment remained in double digits for the rest of the decade, with full recovery coming only with the outbreak of World War II. Furthermore, as I will show later, the Depression was global in scale, affecting almost every country on the planet, not just the United States.
While it is clear from the preceding discussion that recessions and depressions are serious matters, some economists have suggested that there is another, more casual approach to describe the difference between a recession and a depression (recall that I promised a joke at the start of this answer):
What is the state of the economy in 2021?
Indeed, the year is starting with little signs of progress, as the late-year spread of omicron, along with the fading tailwind of fiscal stimulus, has experts across Wall Street lowering their GDP projections.
When you add in a Federal Reserve that has shifted from its most accommodative policy in history to hawkish inflation-fighters, the picture changes dramatically. The Atlanta Fed’s GDPNow indicator currently shows a 0.1 percent increase in first-quarter GDP.
“The economy is slowing and downshifting,” said Joseph LaVorgna, Natixis’ head economist for the Americas and former chief economist for President Donald Trump’s National Economic Council. “It isn’t a recession now, but it will be if the Fed becomes overly aggressive.”
GDP climbed by 6.9% in the fourth quarter of 2021, capping a year in which the total value of all goods and services produced in the United States increased by 5.7 percent on an annualized basis. That followed a 3.4 percent drop in 2020, the steepest but shortest recession in US history, caused by a pandemic.
Is another Great Depression on the horizon?
ITR Economics has predicted that a second Great Depression will emerge in the 2030s for many years. The path to the Great Depression will be significant in and of itself, with numerous opportunities and changes presented. As we all want to optimize earnings and enterprise value, business leaders must begin planning for such changes today.
What trends are influencing this prediction? What should businesses do to prepare for the 2020s? Is there anything that could cause this forecast to change? Check out our resources to discover more about the global impact of this economic catastrophe.
How much of the United States is depressed?
- Figure 1 depicts the prevalence of major depressive episode in persons aged 18 and older in the United States during the previous year in 2020.
- In the United States, an estimated 21.0 million adults had at least one major depressive episode. This equated to 8.4% of all adults in the United States.
- When compared to males, adult females had a higher rate of major depressive episode (10.5 percent) (6.2 percent ).
- Adults between the ages of 18 and 25 had the highest rate of major depressive episodes (17.0 percent ).
- The risk of a major depressive episode was highest among individuals who claimed to be of various races (two or more) (15.9 percent ).
What is the best way to prepare for the Great Depression?
The Stock Market Crash of 1929 is sometimes misunderstood as the origin of the Great Depression. The stock market crash was the straw that broke the camel’s back, since it played a major role in the depression that left 15 million Americans unemployed and half of the country’s banks bankrupt.
Several events occurred before to the stock market crash that put the American economy on uncertain foundation. Before the Great Depression, there were several causes for economic concern:
When you factor in fluctuating oil and energy prices, it’s no surprise that experts forecast a new Great Depression. All the more reason to start preparing now for the coming Great Depression.
What should I put away in case of economic collapse?
Having a strong quantity of food storage is one of the best strategies to protect your household from economic volatility. In Venezuela, prices doubled every 19 days on average. It doesn’t take long for a loaf of bread to become unattainable at that pace of inflation. According to a BBC News report,
“Venezuelans are starving. Eight out of ten people polled in the country’s annual living conditions survey (Encovi 2017) stated they were eating less because they didn’t have enough food at home. Six out of ten people claimed they went to bed hungry because they couldn’t afford to eat.”
Shelf Stable Everyday Foods
When you are unable to purchase at the grocery store as you regularly do, having a supply of short-term shelf stable goods that you use every day will help reduce the impact. This is referred to as short-term food storage because, while these items are shelf-stable, they will not last as long as long-term staples. To successfully protect against hunger, you must have both.
Canned foods, boxed mixtures, prepared entrees, cold cereal, ketchup, and other similar things are suitable for short-term food preservation. Depending on the food, packaging, and storage circumstances, these foods will last anywhere from 1 to 7 years. Here’s where you can learn more about putting together a short-term supply of everyday meals.
Food takes up a lot of room, and finding a place to store it all while yet allowing for proper organization and rotation can be difficult. Check out some of our friends’ suggestions here.
Investing in food storage is a fantastic idea. Consider the case of hyperinflation in Venezuela, where goods prices have doubled every 19 days on average. That means that a case of six #10 cans of rolled oats purchased today for $24 would cost $12,582,912 in a year…amazing, huh? Above all, you’d have that case of rolled oats on hand to feed your family when food is scarce or costs are exorbitant.
Basic Non-Food Staples
Stock up on toilet paper, feminine hygiene products, shampoo, soaps, contact solution, and other items that you use on a daily basis. What kinds of non-food goods do you buy on a regular basis? This article on personal sanitation may provide you with some ideas for products to include on your shopping list.
Medication and First Aid Supplies
Do you have a chronic medical condition that requires you to take prescription medication? You might want to discuss your options with your doctor to see if you can come up with a plan to keep a little extra cash on hand. Most insurance policies will renew after 25 days. Use the 5-day buffer to your advantage and refill as soon as you’re eligible to build up a backup supply. Your doctor may also be ready to provide you with samples to aid in the development of your supply.
What over-the-counter drugs do you take on a regular basis? Make a back-up supply of over-the-counter pain pills, allergy drugs, cold and flu cures, or whatever other medications you think your family might need. It’s also a good idea to keep a supply of vitamin supplements on hand.
Prepare to treat minor injuries without the assistance of medical personnel. Maintain a well-stocked first-aid kit with all of the necessary equipment.
Make a point of prioritizing your health. Venezuelans are suffering significantly as a result of a lack of medical treatment. Exercise on a regular basis and eat a healthy diet. Get enough rest, fresh air, and sunlight. Keep up with your medical and dental appointments, as well as the other activities that promote health and resilience.
Can a downturn become a depression?
Although the following definition is bleak and detailed, its dullness serves to emphasize the fact that the recession/depression question is not so easy to solve. The Federal Reserve Bank of San Francisco attempted to come to a conclusion in 2007 – What is the difference between a recession and a depression? They agreed with the National Bureau of Economic Research’s definition of a recession:
A recession is defined as a major drop in economic activity across the economy that lasts more than a few months and is reflected in real GDP, real income, employment, industrial output, and wholesale-retail sales. A recession starts when the economy reaches its peak of activity and concludes when it hits its lowest point. The economy is expanding between the trough and the peak. The typical state of the economy is expansion; most recessions are brief and have been uncommon in recent decades.
And I turned to Gregory Mankiw to help me understand the difference between two types of economic contraction:
Real GDP has been falling for many years, the most striking example being the early 1930s. If the period is moderate, it is referred to as a recession; if it is more severe, it is referred to as a depression.
Despite the Federal Reserve’s best efforts, the simpler and more widely recognized definition of a recession is a drop in GDP for two consecutive quarters. However, there is little agreement when it comes to depressions; the two most prevalent descriptions are:
While the two meanings are not mutually exclusive, they do differ significantly. The distinction between a recession and a depression, in my opinion, is more complex. A recession is an unavoidable component of the business (or credit, as the case may be) cycle. A depression, on the other hand, entails the physical ruin of the economy: enterprises are irrevocably damaged, job possibilities are obliterated, and investment must be completely written off.
Examining prior Great Depressions is an alternative technique. Unfortunately, this strategy is also inconclusive. The Great Depression of the 1930s, for example, is widely thought to have lasted from 1929 to 1941, yet as the graph below shows, there were only two separate phases of decreased GDP growth between 1930 and 1933, and again between 1937 and 1938:
Despite my more practical definition above, I prefer the two-year-plus definition to the one based on a dramatic drop in GDP. Some aspects of the economy are harmed during a recession. Depression is becoming more common.
A rise in the unemployment rate is another element frequently linked to recessions and depressions. Historically, increased unemployment has preceded the commencement of recessions, and recessions have only been labeled depressions after they have lasted for a long time.
Another factor to consider is the absolute degree of inflation. In general, central banks respond to rising inflation by boosting short-term interest rates. This aids in the cooling of overheated economies. However, if they tighten too quickly, they risk triggering a recession by forcing the credit cycle into a rapid contraction. A depression, on the other hand, is frequently accompanied by an absolute drop in the price level, which is produced by an excessive amount of domestic or corporate debt.
Why does a depression definition matter to you as an investor? Because financial markets are anticipatory. If investors believe the recovery from the Covid-19 pandemic will be ‘V’-Shaped, even a 20% drop in GDP, combined with zero interest rates, price support for government bonds, and fiscal expansion on a scale not seen since FDR’s ‘New Deal,’ will result in a steeply rising stock market. If, on the other hand, it becomes evident that a tsunami of creative destruction is sweeping entire industries away, even the most sumptuous of New Deals may not be enough to stem the flood of stock liquidation as investors flee to the safety of cash.
So far, the official policy response has been enough to persuade investors that a slump will not occur. If you scratch the surface of the S&P 500, though, you’ll see a very different image. The graph below depicts the market’s performance through the end of May. Since then, the S&P 500 index has been driven by the same five technology stocks:
The most successful industry has been technology. One rationale for such high valuations is that the pandemic has hastened a wide range of technological advancements, resulting in the possibility of considerably faster profits. The net present value of future technology cash flows has been shifted forward by several years, according to some analysts. It’s no surprise, they say, that these equities have shattered new all-time highs and will continue to rise.
The broader stock market has been riding the coattails of tech since May (at the time of writing, the MSCI World Index is up 1.73 percent YTD). For the time being, hope wins out over fear, although vaccines are still months away from becoming publicly available. Meanwhile, autumn is approaching in the Northern Hemisphere, bringing with it fears of a second wave of diseases.
The scenario is even worse for emerging markets. In Foreign Affairs The Pandemic Depression, Carmen and Vincent Reinhart wrote:
Despite being labeled a “global financial crisis,” the 2008 downturn was mostly a banking crisis in 11 advanced economies. Emerging economies were remarkably immune to the volatility of the recent global crisis, thanks to double-digit growth in China, strong commodity prices, and lean balance sheets. The current economic downturn is unique. Because of the worldwide nature of this shockthe new coronavirus knows no national bordersa bigger percentage of the global society is in recession than at any point since the Great Depression. As a result, the recovery will be slower and less robust than the downturn. Finally, the fiscal and monetary policies implemented to combat the contraction will alleviate rather than erase economic losses, implying that the global economy will take a long time to recover to where it was at the beginning of 2020.
According to the World Bank, more than 60 million people will be forced into extreme poverty globally. Meanwhile, in wealthy countries, bankruptcies that have been postponed due to government involvement may experience personal epiphanies as fiscal generosity is abruptly withdrawn. The demise of broad swaths of sophisticated market economies has just been postponed unless the lockdown limitations are relaxed and people feel safe, both medically and financially, to venture out and spend.
We will have had two quarters of reduced growth by next month, indicating that we are already in a serious recession. Large swaths of the economy have been irreversibly transformed, increasing the likelihood of a slump. Millions of workers have been displaced, and retraining them will take far longer than a few months. It will be difficult for new and existing businesses to grow and hire new staff without the consumer demand from these former employees.
Fiscal spending will have to be done on a far larger scale and for much longer than previously anticipated. Since 1850, it has taken an average of eight years for per capita GDP to recover to pre-crisis levels in all major financial crises. The G20 response to the epidemic is estimated to have cost $11 trillion so far. The majority of these actions have been described as “temporary” or “short-term.” It is becoming increasingly evident that the disruption to employment, business, and economic sectors will be lengthy and, in many cases, permanent.
According to the IMF, the deficit-to-GDP ratio in advanced nations will grow from 3.3 percent in 2019 to 16.6 percent this year. The ratio is predicted to rise from 4.9 percent last year to 10.6 percent in 2020 for emerging nations, where budgetary expansion is more limited. While borrowing rates in established economies have stayed low, they have increased in emerging markets. The burden of fiscal stimulus will invariably fall most heavily on the advanced economies’ treasuries.
Conclusion
This isn’t the conclusion of the story. This isn’t even the start of the end. But it’s possible that this is the end of the beginning.
Individual economic needs are still important in Western (and other) aging civilizations. Governments in developed countries are fortunate in that they can borrow at lower rates than at any other period in history. While it goes against my Austrian, free-market principles, I have to admit that fiscal policy is the least painful weapon available to resist the pandemic’s economic catharsis. There will be a significant cost in terms of economics, but the alternative is a deadly mix of political fragmentation and polarization.
The goal of securing consistent real income for investors remains difficult. High-yielding private debt and asset-backed lending carries both default and liquidity risk. Financial repression is rampant across the credit spectrum, as shown in the chart below, which looks at some of the public market options:
High-income stocks may be a viable option, but no matter how ‘blue-chip’ the name, there is no certainty. Growth stocks, in general, are benefiting from the historically low-interest environment, but there will be a higher number of failures because the cost of speculative capital is also at an all-time low. Active management has been out of favor for at least a decade, but in the future, capital preservation will be more important than reaping large returns.
In June, I published a piece called A Brave New World for Value Investing, in which I concluded that:
Since late March, the stock and corporate bond markets have restored most of their stability. The repercussions of the global economic slowdown have been mitigated by central banks and governments. As the dust settles, the financial markets will adjust to a new environment, one in which value-based stock and bond market analysis will be an invaluable tool for navigating the waters.
The simultaneous supply and demand shocks, as well as their impact on global supply networks, have heightened the geopolitics of trade policy, which was already a source of conflict before the epidemic arrived. Supply networks will become shorter and more diverse. In the months and years ahead, robustness, not efficiency, will be the watchword. This shift in the global economy’s functioning will not come without a price. It will manifest itself in higher pricing or lower corporate profits. In this brave new world, value-based investment analysis will be the finest guidance.
An additional approach, a momentum overlay, would be added to the investment toolbox. Capital flows will be a formidable arbiter of investment return as fiscal and monetary policy continue to support economies as they transition to the new world order. By most conventional measures, technology companies appear to be overvalued, yet the trend is undeniable. After all, financial market liquidity flows like a tide, so don’t be like Cnut The Great and follow Brutus’ advice in the opening statement.
What happens when the economy is in a slump?
A prolonged, long-term slowdown in economic activity in one or more economies is referred to as an economic depression. It is a more severe economic downturn than a recession, which is a regular business cycle slowdown in economic activity.
Economic depressions are defined by their length, abnormally high unemployment, decreased credit availability (often due to some form of banking or financial crisis), shrinking output as buyers dry up and suppliers cut back on production and investment, increased bankruptcies, including sovereign debt defaults, significantly reduced trade and commerce (especially international trade), and highly volatile relative currency value fl (often due to currency devaluations). Price deflation, financial crises, stock market crashes, and bank collapses are all prominent features of a depression that aren’t seen during a recession.