- Recessions and depressions are periods of significant decline in economic activity. But there's no exact definition for either one.
- We've only had one depression in modern times: the Great Depression, the worst economic downturn in the history of the U.S. and the industrialized world.
- A "depression" label could be appropriate if the unemployment rate exceeds 20% for a long period of time. Economists think that's unlikely.
A shuttered J. Crew store in New York. The apparel purveyor filed for bankruptcy in May, one of the first major retail casualties of the pandemic.Bryan Thomas/Getty Images
The U.S. is officially in a recession.
With unemployment at levels unseen since the Great Depression — the worst economic downturn in the history of the industrialized world — some may be wondering if the country will eventually dip into a depression, and what it would take for that to happen.
By some metrics, joblessness — while improving — may be close to depression standards.
But the downturn will likely fall short of a depression relative to overall duration, economists said.
That's because the causes of the current meltdown are much different and the government has more policy tools at its disposal to buoy the economy than it did in the early 20th century.
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Definition of "depression"
The Great Depression is the only "depression" the U.S. has ever experienced in industrial times.
It spanned a decade, from the stock market crash of 1929 until 1939, when the U.S. began mobilizing for World War II.
There is no exact definition of a depression — just as there's no precise definition for a recession. The latter label is determined by the National Bureau of Economic Research, often months after a recession occurs.
The U.S. officially entered a recession in February, the NBER announced on Monday, bringing an end to the longest expansion in post-World War II history.
A recession is typically defined as two straight quarters of negative gross domestic product, but the NBER has leeway to take into account the depth of a contraction, how quickly it occurs and how much of the economy is affected.
Simply put, both a recession and depression are periods of significant declines in economic activity.
But a depression is a "totally different order of magnitude," said Susan Houseman, research director at the W.E. Upjohn Institute for Employment Research. "We haven't seen anything like it for 80 to 90 years," she said.
Unemployment rate
The unemployment rate is perhaps the best measurement by which to judge if we're in a depression, according to Stephen Woodbury, an economics professor at Michigan State University.
The rate peaked at 25.6% during the Great Depression, in May 1933, according to NBER data.
This year, 21 million Americans were unemployed as of mid-May, as the coronavirus pandemic caused broad shutdowns of economic activity, according to the Bureau of Labor Statistics.
That translates to an unemployment rate of 13.3% — a slight reduction from the 14.7% rate in April, when roughly 23 million Americans were jobless.
With the exception of April, the current unemployment rate is at its highest level since the Great Depression. (The statistic includes furloughed workers, or those on temporary layoff.)
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The unemployment rate has breached 10% only two other times in history, in both cases during recessions — in December 1982 and in October 2009 (which was during the Great Recession, the country's most recent recession).
The speed with which the unemployment rate increased this year is unparalleled in modern history — rising from a half-century low of around 3.5% to its current level in just two months.
By comparison, it took more than a year for Depression-era unemployment to witness an equivalent rise, Woodbury said.
Depression-era rival?
A rate that breaches 20% and persists for several months would likely meet the definition of a "depression," economists said.
That would mean 1 in 5 Americans in the labor force can't find employment.
"We're already way past [prior] recessions," said Jay Shambaugh, an economist and director of the Hamilton Project at the Brookings Institution, a left-leaning think tank. "Do we push this to 20% and stay there for a few quarters?
"If the unemployment rate is 20% in December, I think it's very fair to say we're in a depression."
Unemployment near 20%
In fact, we may closer to that level than the official unemployment rate suggests, according to economists.
For one, the BLS has hinted that the true unemployment rate is actually above 16%.
The agency determines the official rate based on a household survey. Many Americans who should have been classified as furloughed appear to have been mis-classified in the survey — thereby depressing the official unemployment rate, the BLS said.
In April, the same mis-classification occurred. At the time, the BLS suggested the true unemployment rate was around 19.7%.
However, the similarity between the unemployment rate today and during the Great Depression is somewhat "superficial," Woodbury said.
That's because 73% of currently unemployed Americans are temporary layoffs, or furloughs.
That means more than 15 million of the 21 million unemployed Americans are still technically attached to an employer and expect to return to their job once states and companies reopen for business.
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(The number of unemployed Americans, from which the unemployment rate is derived, differs from the number of people who file for unemployment insurance. Not all those who are unemployed apply for unemployment insurance, for example.)
This level of temporary layoffs relative to the total unemployed population far exceeds any other time in modern history (with the exception of April's figure, which was 78%). The next-closest during the post-war era was 24.4% in June 1975.
"That's one big difference between what's happening now and during the Great Depression," Woodbury said. "Those job losses were permanent.
"They were jobs that were lost and gone forever."
Of course, many of those job losses could ultimately be permanent, depending on the scope of business failures and the speed with which economic activity restarts.
Self-inflicted
Some economists also don't believe the unemployment rate — if it officially breaches 20% — will hover at that level for an extended time, as it did during the Great Depression.
"If the unemployment rate drops down to 10% by end of the year, I think people would say this was a really horrendous recession, but not a full-fledged depression, unless it persists for a number of years," Shambaugh said.
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The current economic situation is different from the Depression era because it's largely self-inflicted, economists said. Federal and state officials decided to shut down broad sectors of the economy to stem the spread of the coronavirus, and the economy could rebound as states and businesses begin reopening.
The Great Depression, by contrast, wasn't self-inflicted but the result of many factors, such as a stock-market crash, use of the gold standard, deflation and the lack of any real fiscal or monetary policy from the Hoover administration to combat the crisis, Shambaugh said.
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Unemployment insurance, for example, wasn't created until 1935, in response to the Great Depression.
Doing enough?
The U.S. government was caught flat-footed in the early years of the Great Depression, since it didn't yet have many of the economic tools currently at its disposal, economists said.
This time, federal officials have implemented relatively aggressive measures, such as various lending programs for small businesses, enhanced unemployment benefits and direct payments to Americans, to try to stave off a further catastrophe from the coronavirus, economists said.
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And the economy added 2.5 million jobs in May, the largest increase on record, leading some experts to be optimistic about the prospects of a speedier recovery than previously anticipated.
"We can still debate whether we're doing enough," Houseman said. "It's hard to tell when you're in the middle of it."
Source: cnbc.com