Recession vs. Depression

Do you think it is very likely that we'll head into a depression because of all this financial mess?

It might be helpful to define some terms.
One wag has said that a recession is when you lose your job. But a depression is when I lose my job.
There are some common (if serious) definitions of economic recessions and depressions. A recession is said to occur when an economy goes backward for at least two quarters (six months) in a row. A depression is less often identified by a specific number, but is said to occur when an economy shrinks "significantly" and lasts several years.
No one doubts that we are presently in the midst of some sort of economic recession. How deep and long it will last is usually only discernible after the fact, but it's a pretty good bet that this one is going to be on the big side.
Because we are linear creatures that tend to extrapolate our current trajectory to the extreme, it's natural that many folks are asking today, "Are we headed toward another Great Depression?" No one can guarantee that will not happen. But there are significant reasons to believe we are not headed to that extreme.
More production. We call all the stuff we make each year Gross Domestic Product (GDP). This is what we watch to see whether or not our economy is in recession. It seems inevitable that once all the chips are counted for 2008 that we'll see economic shrinkage. Suppose the number comes in at 2 percent to 3 percent economic shrinkage. That's a recession for sure.
Contrast that to the shrinkage of GDP during the Great Depression — it was 27 percent. Our nation's industrial production shrunk by 50 percent. We're nowhere near those kinds of cataclysmal numbers, nor are there any credible voices that anticipate that.
More jobs. This column is being written before the Friday jobs numbers come out. But suppose they show the unemployment rate at around 7 percent. It's likely to head higher before things level off. But during the Great Depression unemployment reached 25 percent — imagine one out of every four people in this nation unemployed. Not pretty, but we're not anywhere close to that.
More sales to others. During the Depression, governments around the world pursued a campaign of mutually assured destruction by putting up barriers to trade. This withered economic activity worldwide, destroyed jobs and caused incalculable misery in this country and around the world. U.S. exports shrank by 66 percent during the Depression era. Thankfully, our understanding of trade is very different today. While U.S. exports may shrink during a recession, the shrinkage will pale in comparison to the Depression.
More money. During the Depression the Fed foolishly pulled money out of the economy, thinking it could punish speculators without harming the overall economy. These days that approach has about as much economic credibility as the use of leaches for medical purposes. What the economy needs during a recession is a reasonable amount of money injected into it to stimulate economic growth without sowing the seeds of inflation. While this is a difficult balance to strike, attempts to strike that balance are far better than the economic leaching done during the Depression.
Recessions are best seen as a season of pruning. Pruning is painful and seems to head in the opposite direction of anyone wanting fruit off the tree. But the experienced gardener knows this cutting back is actually the secret to more and healthier fruit later.
Be wise. Be careful. Make the changes you need to make it. But whatever you do, don't give up or give in to despair.
Because of today's pruning there will be harvest days again.
Byron R. Moore, managing director for the planning group of Argent Advisors, Inc. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at 251-5858.The views expressed in the preceding commentary do not necessarily reflect the views of Argent Advisors Inc.