How Close Are We to an Economic Depression?

Are we on the verge of a Second Great Depression?

There has been a lot of whispering lately that our current economic crisis may be leading to another Great Depression.

On Tuesday, the ultra-liberal Nation magazine proposed that we might already be in the midst of the Second Great Depression.

Though there is no universally-agreed-upon definition of the term “depression”, an op-ed in Wednesday’s Wall Street Journal proposed one common definition: a 10% decline in per capita GDP.  

If we take the definition of “10% decline in per capita GDP” as our working definition, how close are we to this kind of economic depression?

For the sake of this analysis, we’ll equate real GDP with per capita GDP, since month-to-month national population changes are trivial. For the curious, the US Census does publish that data.

On Monday, the Associated Press reported:

“A Depression doesn’t have to be Great — bread lines, rampant unemployment, a wipeout in the stock market. The economy can sink into a milder depression, the kind spelled with a lowercase ‘d.’

“And it may be happening now.

“The trouble is, unlike recessions, which are easy to define, there are no firm rules for what makes a depression. Everyone at least seems to agree there hasn’t been one since the epic hardship of the 1930s.

“But with each new hard-times headline, most recently an alarming economic contraction of 6.2 percent in the fourth quarter, it seems more likely that the next depression is on its way.”

Government (and press) are inflating data to hype the economic crisis

Here’s the problem: the 6.2% decline that the AP cites doesn’t really exist. That piece of data comes from a Bureau of Economic Analysis report from last Friday that announced a 1.6% quarterly GDP decline estimate — with an annualized rate of 6.2%.

For those with quick brains: 1.6 x 4 = 6.4, not 6.2, the discrepancy is likely due to the rounding of both numbers for simplicity.

As the New York Times graph (above) demonstrates, the only actual decline in GDP, so far, has been the 1.6% of last quarter. Any annualized extrapolation beyond the current quarter’s data, is pure conjecture. This curve could turn up or down, we don’t yet know.

This is all to say that the government announcement, and the AP report on it, are hyping the data to indicate GDP declines four times worse than they actually are.

I’m perfectly willing to concede that the data for 2009 could be as bad as (or worse than) a 6.2% decline in the American economy, but let’s wait for the data. Hype and fear aren’t going to help anything.