During a recent client meeting, I was asked what the difference was between a recession, a deep recession, and a depression. I was familiar with the definition of a recession, but not so sure of when a recession becomes a depression.
The comical answer is that a recession is when your neighbor loses his job; it’s a depression when you lose your job. Of course there is nothing funny about anyone losing their job, but the ups and downs have been part of the economic cycle since there has been an economy cycle.
Recessions are officially dated by the National Bureau of Economic Research, a group of economists who monitor and measure several economic indicators which factor into the declaration that the economy is expanding or contracting. Some of the factors included in the analysis are employment, industrial production, real income and wholesale and retail sales. In simple terms, a recession is a contraction of overall economic activity, which is why some jobs are lost causing unemployment to rise during most recessions.
The current recession, which may be over already, is being called a "deep recession" because it has lasted as long or longer than any other since World War II. But to put it in context, research from JP Morgan tells us that the decline in gross domestic product has been -3.1 percent since the recession began, about the same decline as the recession in the early 1970s and short of the decline experienced in the early 1950s of -3.7 percent.
Several months ago I wrote an article here in The Sun explaining why I thought the chance of a "depression" were very slim. My reasons were primarily that all of the monetary, fiscal and political mistakes which plunged the country (and the world for that matter) into the Great Depression, were not being made this time around. In fact, the opposite actions were being taken and it seemed unlikely we would spiral into something as severe as was experienced in the 1930s.
A "depression,” by definition, is a decline in economic activity of more than 10 percent. Remember, we have only seen a decline of just over 3 percent so far during this latest period and we are seeing signs of stabilization. The Great Depression, a repeat of which is everyone’s greatest fear, was a monster. The period of the 1930s actually contained two separate depressions. From late 1929 to 1933, total economic activity in the U.S. declined by over 30 percent!
A period of recovery from 1934 to 1937 brought a little relief, but from 1937 to 1938 the economy dipped again, this time to the tune of an 18 percent contraction. It’s no wonder when you speak to someone 80 years old or older they have plenty of stories to tell about survival during that terrible time.
I can’t claim to be able to predict the future, and perhaps I’m wrong and we have another year or so of bad times to come, but even if we sustained another 3 percent decline in the economy from this point, we would be less than one fifth of the way to a decline that started the Great Depression. Take hope and optimism from the fact we have survived worse, and I suspect we will survive this experience as well.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing.