News: Recession? Depression?

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Is this the worst economy since the Great Depression? And what are the chances of the economy falling into another depression?

The answer to the first question is fairly clear. In most ways that matter to economists and average Americans, this is the worst economic crisis since the Depression.The answer to the second question is not as clear. While the National Bureau of Economic Research officially declares the beginning and end of recessions, nobody does that for depressions.
Still, the general consensus of economists is that another depression is not likely. But the risks are greater than they were only a few months ago.Is this the worst economy since the Great Depression?

Why this recession is so bad
First things first: Even though it may seem obvious to most that this is the worst downturn since the Great Depression, the economy has experienced other serious recessions in the past, particularly in the mid-1970s and early 1980s.

But this recession dwarfs those two for several reasons.

In terms of length, the longest post-Depression economic decline was 16 months, which occurred in both the 1973-75 and 1981-82 recessions. This recession began in December 2007, which means that the current recession will enters its 17th month next Wednesday.

The current recession is also more widespread than any other since the Depression. The Federal Reserve's readings show that 86% of industries have cut back production since November, the most widespread reduction in the 42 years the Fed has tracked this figure.

What's more, every state reported an increase in unemployment this past December, the first time that has happened in the 32 years that records for unemployment in each state have been kept.

"This is important because there's no where you can move to find a job," said Gus Faucher, director of macroeconomics for Moody's Economy.com.

Finally, during the past nine months, the drop in household wealth has been larger since anything on record in the post-World War II period.

Why this won't be another depression
So far during this recession, the nation's gross domestic product, the broadest measure of economic activity, has dropped about 1.7%. Forecasts of experts surveyed by the National Association for Business Economics work out to about a 3.4% decline in GDP over the life of this recession.

To be sure, there already have been some quarters where the drop was much more severe. The government will report its final revision of GDP for the fourth quarter of 2008 and economists are expecting that report to show an annual rate of decline of 6.6%. And some economists think the drop in the first quarter could be even greater.

But measuring the drop in economic activity from top to bottom is the way economists judge how deep a recession is. And a 3.4% drop would be the worst since World War II, and far worse than the average recession in that period.Still, that's a long way from the 26.5% drop in GDP that took place between 1929 and 1933.

One of the main reasons why economists think another depression could be avoided is that it will take more than just a sharp decline in consumer spending and household wealth to spark a depression.

Even though household net worth has fallen a record $11 trillion, or 18%, during the course of this recession so far, the broader economy can weather such a shock.

Historically, stock market crashes and housing bubbles bursting haven't necessarily led to depressions. It takes a variety of economic factors and policy decisions to turn a recession into something even more serious.

"I don't know if you can make a causal link between a loss of wealth and a depression," said Lakshman Achuthan, managing director of Economic Cycle Research Institute.

Learning lessons of the 1930ssignificant policy changes since the 1930s will also cushion the blow somewhat.Unemployment insurance, social security payments, and larger government at the federal, state and local levels all keep money flowing into the economy even as consumers and businesses pull back on their own spending.

"There's a lot more safeguards in place," said Keith Hembre, chief economist at First American Funds.Hembre said the $787 billion stimulus bill passed by Congress in February will also spur more economic activity down the road.

In addition, the Federal Reserve, led by Great Depression expert Ben Bernanke, has pumped trillions of dollars into the economy with new lending programs the central bank has never tried before. That has swelled the supply of money. By way of contrast, the money supply tightened during the Great Depression.

There were many other policy mistakes made in the 1930s that economists say are not being repeated today, including stiff tariffs that killed international trade and government imposed limits on prices and production levels.

Even if Congress imposed "Buy American" provisions in the public works paid for by the stimulus bill, there is no call to move back to the strict protectionism of the 1930s or production and price controls.

"I'd like to think we've learned something, so in terms of policy we're doing better," said Achuthan.

Still, even if the U.S. does not enter another depression, that doesn't make the current economic crisis any less painful for many Americans. Also, few economists are predicting an end to the recession anytime soon.

Hembre said he is worried that the U.S. could be in a period of prolonged economic stagnation similar so the so-called lost-decade that Japan suffered starting in the 1990s. He said continued weakness in housing and high debt levels by households and governments could hold the economy back for some time.

And some economists aren't completely ruling out another depression.

In a paper for the National Bureau of Economic Research last month, Harvard University professors Robert Barro and Jose Ursua put the chance of a minor depression (which they defined as a GDP decline of at least 10%) at about 20% and a 3% chance of a major depression (defined as a GDP drop of at least 25%). Moody's Economy.com is forecasting a 10% chance of a depression.

Bilibala's comments:
I don't think depression will happen, even though many say that card card market and commercial paper market will collapse. I think they will fall, but not collapse, at least based on the economic data as of now.