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Will the U.S. Go Into Depression in 2009?

Will the U.S. Go Into Depression in 2009?


This month (November 2008), the two most common questions I have been asked are, in order:
  1. Is the U.S. in a depression?
  2. Will the U.S. go into a depression in 2009?
To be able to answer those questions, we first need to define exactly what we mean by a depression.

What is a Depression?

As I wrote in Recession? Depression? What's the difference? and as Michael Mandel discovered, there is no commonly accepted definition of an economic depression. A good rule of thumb is "economic downturn where real GDP declines by more than 10 percent." Depending on which data set you use, the closest the U.S. has come to a depression since 1937-38 was the 1974-1975 period, where real GDP fell by 4.9 percent. However, other data suggests that there was a depression during 1981-1982:
    Goldman’s GDP contraction calls would mark the steepest recession since the economy shrank 4.9 percent in the fourth quarter of 1981 and 6.4 percent in the first quarter of 1982 after Fed chairman Paul Volcker drove the overnight interbank rate to as high as 20 percent to stem inflation.
I do not believe most economists would consider the 1981-82 period a "depression", though I believe I heard Brad DeLong use the phrase "1981-82 depression", though I may be mistaken.

If we accept the rough guideline of a recession being an "economic downturn where real GDP declines by more than 10 percent" we can investigate our two questions.

Is the U.S. in a depression?

As of November 2008 the economy clearly is not. In fact the data we have suggests the economy has been been growing, not shrinking:
    "Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent."
Most analysts believe that the next round of statistics will show an economy in decline - but that is a discussion for the second question. Given what we know right now we cannot even conclude we are in a recession, let alone a depression.

Will the U.S. go into a depression in 2009?

If we take the question to mean "Will Real GDP decline by more than 10 percent in 2009", we can see if forecasts come anywhere near this level of decline.

First Goldman Sachs estimate:
    "The economy will shrink at a 3.5 percent annual rate in the fourth quarter and at a 2 percent pace in the first quarter of 2009, nearly twice prior estimates, Goldman Sachs Group Inc. economists led by Jan Hatzius wrote yesterday in a note. That would be the biggest back-to-back contraction since 1982."
A 6 month contraction of 5.5 percent is quite severe, but still a long way from a depression.

Second, Dr. Doom himself, Nouriel Roubini:
    "The U.S. will experience its most severe recession since World War II, much worse and longer and deeper than even the 1974-1975 and 1980-1982 recessions. The recession will continue until at least the end of 2009 for a cumulative gross domestic product drop of over 4%; the unemployment rate will likely reach 9%. The U.S. consumer is shopped-out, saving less and debt-burdened: This will be the worst consumer recession in decades."
Again, quite severe, but nowhere near a depression.

Third, the OECD:
    "The U.S. is leading the slowdown as the largest economy in the world is forecast to shrink 0.9 percent next year after 1.4 percent growth this year, the OECD said. Japan will see a contraction of 0.1 percent next year after a projected 0.5 percent expansion in 2008, the OECD said."
A far more optimistic forecast than provided by Dr. Doom or Goldman Sachs - suggesting we are light-years away from a depression.

No To a Depression

Given everything we know, a recession appears likely, but a depression? Not at all. I would love to hear your thoughts - you can leave them at this blog entry.

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