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Monday, April 13, 2020

What is a Recession? What is a Depression?

by Calculated Risk on 4/13/2020 11:38:00 AM

People frequently say a recession is two quarters of declining GDP. That is not the definition used by the National Bureau of Economic Research (NBER):

The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. For more information, see the latest announcement from the NBER's Business Cycle Dating Committee, dated 9/20/10.
I was using the NBER definition when I made a call that a recession started in March 2020. Clearly there has been "a significant decline in economic activity spread across the economy" that will last more than a few months.

But what is a Depression? Back in March 2009, I wrote:
It seems like the "D" word is everywhere. And that raises a question: what is a depression? Although there is no formal definition, most economists agree it is a prolonged slump with a 10% or more decline in real GDP.
It appears likely that GDP will slump more than 10% over the next several months, but will the slump be "prolonged"?   My current guess is the worst of the economic slump will be in Q2, and then the economy will slowly start to expand.   So that wouldn't be "prolonged".  Of course, if we try to open the economy too soon - or too quickly without the proper preparedness (testing, masks, guidance) - then the economic damage will be more prolonged.