Economic Perspective: What Makes a Recession or Depression

MARY WALDEN:

“Today’s program looks at recession versus depression. Mike, many economists say we are now in a recession as a result of the coronavirus, but I’ve also heard some say the economic fallout may be so bad that we may soon be in a depression. What’s the difference?” 

MIKE WALDEN:

“Unfortunately there are no set definitions. The call of a recession or a depression is made by a private think tank called the National Bureau of Economic Research. And generally the NBER, as it’s called, will require that the economy recedes, that is sales go down, unemployment goes up, incomes go down, for at least six months to be either a recession or a depression.”

“Now if a recession occurs that generally means that the drop in economic activity is somewhere between one and 10 percent. If it goes beyond 10 percent, usually that’s enough for the NBER to say, ‘Alright, this has been so severe we’re going to call it a depression.’ So it’s really that 10 percent level.”

“Now right now if we look at the economic forecast, and they are forecasts – we don’t know exactly what’s going to happen. Most economic forecasts that I’ve seen suggest that we may get a 10 percent or more drop in one quarter, but we’re probably not going to get it in two quarters. That is, we’re not going to get it over an entire six month span.” 

“So right now, right now, the thinking of this economist, me, is that we’re probably going to escape having the decline in the economy that we’re going through called a depression. I think it’ll probably be called a recession. But on the other hand, if things get out of control, if we have the coronavirus go away and then come back, all sorts of things. All the balls are in the air. We really don’t know where we’re headed with this. It could get so bad we may be looking at a depression.”

Mike Walden is a William Neal Reynolds Distinguished Professor in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook, and public policy.