Economic recessions and economic depressions

Since 1854, the United States has been through 32 economic cycles, one cycle lasting (average) nearly 5 years.  That’s not the length of a recession, that’s an entire economic cycle.  This includes some recessions/depressions in the 1800’s that lasted 3 years, another for 6 years and a long depression that lasted from 1873 through 1896, a period of 23 years.

And that’s just the 1800s!

A recession is “often defined” as two consecutive quarters of negative growth in the economy, as measured by gross domestic product (GDP).  But just like in baseball, the numbers can be “massaged” or explained away in lots of directions.  According to the National Bureau of Economic Research (and they are the group that calls them!), 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.”

Ummm, got that?

It is quite remarkable, that since the end of World War II, the longest recession has been two years.  In fact, (according to the National Bureau of Economic Research) since 1945 the average recession has been 10 months.  Sidebar: I studied economics in college.  The material can be very dry.  This is a not a bad site!

Recessions are measured by growth (or said better, a lack of growth) in the economy.  It’s important to keep that in perspective, as job losses sometimes increase — well past the technical “end date” of a recession.  In fact, it is quite possible that job losses could be higher in the year following a recession, than during a recession.

In terms of severity, two recent recessions were more harmful than others: the recession of late 1973 – early 1975, and the recession of the early 1980s (81-early 83).  These two recessions lasted 16 months each.

It’s important to point out that the economy doesn’t experience “vast” improvement when a recession technically ends… the damage has been done, and for some areas of the economy the recovery never occurs.  Personally, I know some manufacturing businesses that were hurt in the recession of the early 1980s that never recovered…that was 25 years ago.  You may know contractors and people associated with the real estate industry who are still licking their wounds 16 years after the recession of the early 1990s.

Let’s shift gears for a moment and talk about the stock market. It’s important to remember that the stock market tends to reflect what may be happening with the economy six to 12 months ahead.  The stock market is a forecasting machine, and the market tends to go down months ahead of economic slowdowns — and also rises months ahead of perceived economic recovery.

Since the average recession lasts 10 months, in general, stock markets ought to turn up about half way through the “typical” or “mild” recession.  In some cases, we may not even know we’re in a recession until we’re OUT of a recession.  We know it, though, this time.  Recessions, like taco sauce, can either be mild or severe.

See, this current recession “officially” began in December 2007.  At the time of this writing, we are entering the 13th month of an economic downturn.
But…suppose this is not “just” a severe recession.  What if this is a depression?

First, the National Bureau of Economic Research does not have a definition for “depression.”

What is a depression?  I first heard Ronald Reagan say (although it has been claimed by other economists) that a recession is what happens when your neighbor loses his job.  When you lose your job, that’s a depression.

A generally accepted understanding of an economic depression is where real gross domestic product (GDP) declines by more than 10%.  Anything less would be considered a severe recession.  To give you some perspective, the economic downturn from 1929 through 1933 saw a decrease in GDP of 33%.  The economy actually recovered during the from mid-1933 through 1937.  But from mid-1937 through June 1938, GDP declined again by 18%.  Although many people refer to this entire period as the Great Depression, there were actually two depressions that took place between 1929 in 1940.

There were several reasons for two back-to-back unmitigated disasters.  In fact, in preparation for this post, I read an excellent speech given by the current Chairman of the Federal Reserve, Ben Bernanke, which you can find here.  But we’ll get into that in another post.
But how about some perspective on all that depression talk?  Since the time of the Great (two) Depressions — the most severe recession occurred in the 1970s, where real GDP fell 4.9%.  Are you with me so far?

Where are we now?  More perspective:
Fourth-quarter 2007 GDP showed a decrease of -0.2%
First-quarter 2008 GDP showed an increase of 0.9%
Second-quarter 2008 GDP showed an increase of 2.8%
Third-quarter 2008 GDP showed a decrease of -0.5%

The advance announcement for fourth-quarter GDP will be released on January 30, 2009
The preliminary announcement for fourth-quarter GDP will be released on February 27, 2009
The final fourth-quarter 2008 GDP will be released on March 26, 2009