Defining "Depression"

Here is an interesting bit from the Calculated Risk website where he offers up a definition of an economic "depression".

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.

Go read the whole blog entry and especially look at the graphs. They are surprising for two reasons: (1) they show that the current decline is not that great compared to past recessions and (2) the graphs appear "wonky" to me (they appear inconsistent: the Post WWII decline is presented as a 13% peak-to-trough total decline but the rate of decline is less than 2% for just 4 quarters which should sum to less than an 8% total, on the other hand, the 1981 recession is shown as roughly a 4% peak-to-trough total decline, but the rates of decline are 2% to 3% over 12 quarters which should sum to a total decline of 12%, something is wonky here... part of the mystery can be solved by going to the Bureau of Economic Analysis (BEA) and looking at the original data, it shows that 1946 was the real post WWII recession with an 11% decline, but the graphs provided by Calculated Risk start in 1947 and if you look at the quarterly versus annual data at BEA you can see that the quarterly rates are highly irregular so Calculated Risks graph of quarterly rates -- which truncates any positive growth -- is highly misleading).

Bottom line: We tend to think the current situation is the end of the world, but these graphs -- assuming they are correct -- would imply that things aren't that much worse than other severe post-WWII recessions. I was certainly surprised since I've been swept up in the hysteria about falling markets and a collapse in economic activity. Since I'm not happy with Calculated Risk's graphs, I'll have to remain sceptical until I see more real information.