by Calculated Risk on 3/10/2009 08:09:00 PM

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.

Yesterday I heard an analyst say that a 10% unemployment rate is a depression. But the unemployment rate peaked at 10.8% in 1982, and that period is usually not considered a depression.

Some people argue the duration of the economic slump defines a depression - and the current recession is already 15 months old. That is longer than the recessions of '90/'91 and '01. The '73-'75 recession lasted 16 months peak to trough, and the early '80s recession (a double dip) was classified as a 6 month recession followed by a 16 month recession (22 months total). Those earlier periods weren't "depressions", so if duration is the key measure, the current recession still has a ways to go.

Here is a graph comparing the decline in real GDP for the current recession with other recessions since 1947. Depression is marked on the graph as -10%.

Click on table for larger image in new window.

Q1 2009 is estimated at a -7.0% decline in real GDP (Seasonally adjusted annual rate). This will push the cumulative decline (peak to trough) to about 3.4%.

Even though the current recession is already one of the worst since 1947, it is only about 1/3 of the way to a depression (assuming a terrible Q1).

To reach a depression, the economy would have to decline at about a 6.6% annual rate each quarter for the next year.

The second graph compares the current recession (estimated through Q1 2009) with the more severe recessions of the last century.

Note that the data is annual for the pre-1947 economic slumps.

The Great Depression saw real GDP decline 26.5%.

The post-WWII recession lasted 8 months and saw real GDP decline 13%. This decline in GDP was due to winding down the war effort - something that was celebrated - and is excluded when analysts call the current slump the "worst since the Great Depression".

I still think a depression is very unlikely. More likely the economy will bottom later this year or at least the rate of economic decline will slow sharply. I also still believe that the eventual recovery will be very sluggish, and it will take some time to return to normal growth.

As I noted last weekend, business cycles have a typical pattern (see Business Cycle: Temporal Order). Housing and personal consumption usually lead the economy out of recession - and both of these areas will probably be slow to recover this time.

The following table and text are an excerpt from the previous post. The table shows a simplified typical temporal order for emerging from a recession.

When Recovery Typically Starts

During Recession	Lags End of Recession	Significantly Lags End of Recession
Residential Investment	Investment, Equipment & Software	Investment, non-residential Structures
PCE	Unemployment(1)

This business cycle there are reasons that housing will not be a significant engine of recovery. It is possible - see Looking for the Sun - that new home sales and housing starts will bottom in 2009, but any recovery in housing will probably be sluggish.

That leaves Personal Consumption Expenditures (PCE) - and as households increase their savings rate to repair their balance sheets, it seems unlikely that PCE will increase significantly any time soon. So even if the economy bottoms in the 2nd half of 2009, any recovery will probably be very sluggish.

At least we know what to watch: Residential Investment (RI) and PCE. The increasingly severe slump in CRE / non-residential investment in structures will be interesting, but that is a lagging indicator for the economy.

(1) In recent recessions, unemployment significantly lagged the end of the recession. That is very likely this time too.

by Calculated Risk on 3/10/2009 06:13:00 PM

From the NY Times: Rising Appeal of Short-Term Leases

Both tenants and landlords seem to be growing afraid of commitment these days. With the economic outlook murky at best, fewer of them want to tie themselves to long leases.

In Manhattan, where office leases often last 10 years, there has been a noticeable uptick recently of leases lasting only one to three years. ...

In all of Manhattan, 21 percent of the office leases that were signed in the fourth quarter of 2008 were for three years or less, compared with 15 percent in the corresponding quarter a year earlier, according to Cushman & Wakefield, a real estate brokerage firm that compiles data on commercial transactions. Brokers say they expect short-term leases to become even more fashionable this year.

“There’s a lot of anxiety out there, and short-term decisions are easier to rationalize,” said David L. Hoffman Jr., a principal at Colliers ABR, a real estate services company.
...
[Jeff Furber, the chief executive of AEW Capital Management] said that tenants were driving the demand for short-term contracts and that he would be happy to sign office leases for five years or more. “But business conditions are deteriorating so rapidly,” Mr. Furber said. “Tenants are saying that they’re just not sure how much space they’ll need in a year or two, so it is hard for them to commit.”
...
“This is the first time that I can remember when both landlords and tenants want to do short-term leases,” [Ken Perry, the chief investment officer and director of asset management for the Swig Company] said.

He said that usually one side or the other saw an advantage in this approach, depending on which direction rents were thought to be heading. “But with all of this uncertainty in the markets, neither side wants to go long term.”

As Mr. Perry notes, usually one party or the other wants to go long term. Now landlords don't want to go long term - because they are hoping rents will recover - and tenants don't want to go long term because business conditions are deteriorating rapidly and they don't want to be stuck with excess space. Interesting times ...

Update: to be clear - it is a tenant market - so whatever the tenant wants, the tenant gets.

by Calculated Risk on 3/10/2009 03:57:00 PM

Quite an up day ....

DOW up 5.7%

S&P 500 up 6.3%

NASDAQ up 7.1%

The following graph puts the rally into perspective:

Click on graph for larger image in new window.

This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

This is the 2nd worst S&P 500 / DOW bear market in the U.S. in 100 years.

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 3/10/2009 03:34:00 PM

From Dow Jones: Con-way CEO Sees Evidence Of Bottoming In Volume Slide

Con-way Inc. Chief Executive Doug Stotlar voiced some optimism Tuesday that a persistent slide in freight volumes could be stemming, citing a seasonal uptick so far in March.

"We hope that we're at the bottom," Stotlar said, speaking at a Raymond James conference in Orlando, Fla.
...
But Stotlar, whose comments were broadcast over the Internet, added that he can't quantify the March increase yet nor say for certain that it signifies a bottom.

Tonnage at Con-way's main unit, its less-than-truckload freight business, was off about 13% in January and about 12% last month. Stotlar said the company is getting a seasonal lift so far in March - indicating the trend may have bottomed - although "we're at a much lower level than we were prior to the economic downturn."

The trucking survey should be available soon.

by Calculated Risk on 3/10/2009 01:56:00 PM

From MarketWatch: AT&T to spend up to $18 bln on capital expenditures in 2009

AT&T Inc. said Tuesday it plans to invest $17 billion to $18 billion in 2009. About two-thirds of expenditures are earmarked for expanding the company's wireless and wired broadband networks, AT&T said.

The story doesn't mention that AT&T spent $20.3 billion on capital expenditures in 2008, so the announcement today is in line with AT&T's previous announcement on Jan 28th:

Total capital expenditures for 2009 are expected to be down 10 to 15 percent versus 2008 levels.

I guess the good news is they didn't reduce their plans further!

Note: There will be a significant investment slump in Q1 2009, especially in equipment & software and non-residential structures.