Are we in a Depression?…Not Quite

I was reading a weekly publication today and I saw the results of a poll asking if respondents considered our present economy a “depression”. Surprisingly, nearly two-thirds of New Yorkers feel that we are either definitely in a depression or may be in a depression very soon. And it is no wonder that people feel this way as many of the politicians we have listened to lately (from the very top on down) have been using language which is nothing short of fearmongering. Phrases such as, “an economic abyss from which we may never recover”, “catastrophic economic conditions”,  “a coming economic apocalypse”, “a complete economic meltdown” and “without this stimulus package, another depression will befall us”.  Of course the game of politics operates this way and swaying congressional votes is assisted with such grand statements.

What these politicians seem not to realize is that this rhetoric is, in fact,  harmful to consumer confidence and consumer spending.  People are starting to believe these proclamations as evidenced by the referenced poll. These statements may make for good political theatre but they do not accurately reflect the current state of our economy.

Please do not misinterpret my intentions here.  I know that times are difficult, the ecomomy is hurting and to those who have lost jobs or are  suffering financial hardship, they really dont care how the economy is characterized, they only care about paying this month’s bills. My heart goes out to them and I am not making light of their circumstances. The fact is, however, that today the state of  our economy is much more similar to the recessionary period of the early 1980’s than it is to the Great Depression in the 1930’s. Let’s compare these points in time.

Because there is not much real estate information available from the Depression period(other than knowing that the construction boom of the roaring 20’s came to a screetching halt), let’s take a look at employment, which is the metric that has the most profound effect on real estate fundamentals. Extrapolations can be made from there. In 2008, the US lost 3.4 million jobs which represents 2.2% of the labor force. From November of 1981 to October of 1982, 2.4 million jobs were lost but because the labor force was smaller, this reduction also equalled 2.2%. During the Great Depression, job losses were of a completely different magnitude. In 1930, the labor force shed 4.8%, in 1931 6.5% and in 1932 another 7.1%!  The overall unemployment rate today is 7.6%. At the peak in 1982 the rate reached 10.8% and in 1932 the rate was 25.2%. (Using the same formula to calculate the rate that was used in the prior periods, today’s rate would be 13.9%. )

If we look at GDP, in 2008 total GDP rose notwithstanding an abysmal 4th quarter which showed a 3.8% reduction in output (look for this figure to be revised downward). The Congressional Budget Office projects a decline of 2% for 2009 while several economists are projecting reductions of 3% to 4%. In 1982 GDP contracted by 1.9%. Compare these figures to 1930, 1931 and 1932 when the contractions in output were successively 9%, 8% and 13%.

During the Depression, 10,000 banks failed. Thus far in this cycle, approximately 35 have failed with another 200 on the FDIC watch list. In 2008, the Dow Jones lost 36% of its value while in the early 1930’s the crash reduced equity values by 90%. Auto production declined by about 25% last year while in 1932 the reduction was 90%. The Depression lasted 11 years while this recession has been with us for only 14 months thus far.

So yes, things are tough today, very tough. Unemployment will continue to rise and more pain will be experienced. But a comparison of the two eras leads us to the conclusion that we are not in a depression……yet!

24 Responses to “Are we in a Depression?…Not Quite”

  1. 1 Steven Padilla February 19, 2009 at 2:37 pm

    Couldn’t agree more. The voice of reason is a beautiful thing.

  2. 2 rknakal February 19, 2009 at 2:57 pm

    Hi Steven, Thanks for your response. I wish there were more voices of reason in Washington.

  3. 3 Jim February 19, 2009 at 3:59 pm

    Bravo! Summed up in this famous quote, “The only thing we have to fear is fear itself” – FDR

  4. 4 rknakal February 19, 2009 at 4:26 pm

    Jim, Thanks for the note.

  5. 5 Paul R White February 19, 2009 at 8:57 pm

    Good to read an analysis based on facts instead of opinions.

    As for real estate values, please clarify for me what factors you think influence this the most. You’ve mentioned credit availability and employment.
    If we continue to see deflation and deleveraging wont property values continue to fall?


  6. 6 Bruce S February 20, 2009 at 1:06 pm

    Yeah! The voice of reason!

  7. 7 John McMullen February 20, 2009 at 4:31 pm

    Good article. We need more people out there with a positive viewpoint.

  8. 8 rknakal February 22, 2009 at 6:22 pm

    Hi Paul, thanks for your question. If we continue to have credit problems, that will definitely exert downward pressure on prices. As unemployment rises (as it is likely to do well into 2010)it erodes real estate fundamentals and has a negative impact on value. In general, deflation creates what economists call a “negative feedback loop” which continues to exert negative pressure on prices of all goods and services. The deleveraging process will occur over a period of years and is not necessarily a bad thing for the long term health of the market but, in the short term, it has a negative impact on value. This is because equity is more expensive than debt and the more equity you need, the less you can afford to pay. For example, think about what real estate would be worth if you could not leverage it.

    The duration and depth of each of these factors will determine exactly how low prices will go. That being said, many investors are buying today because properties they would like to own are available and they may not be availabe in the future. It is impossible to pick the absolute bottom of the market and some investors are feeling that prices have fallen enough already to make purchasing now compelling.

  9. 9 rknakal February 22, 2009 at 6:41 pm

    Hi John, thanks for the note. Today, we should all see the glass as one-third full!

  10. 10 rknakal February 22, 2009 at 10:37 pm

    Bruce, thanks for the note

  11. 11 Fred February 23, 2009 at 10:10 am

    I hope this doesn’t sound like a dumb question but what does this mean:

    “Using the same formula to calculate the rate that was used in the prior periods, today’s rate would be 13.9%”

    Obviously, this unemployment rate would be very alarming in comparison to what we are seeing in the news.

  12. 12 rknakal February 23, 2009 at 10:38 am

    Hi Fred, that is not a dumb question at all. During the Clinton administration, the calculation of the unemployment rate was changed such that people who have been out of work for longer than 1 year are considered to be no longer looking for work (ie, not unemployed) and part time workers who want to work full time but can’t find a full time job are no longer considered unemployed. This change was implemented to make the numbers look more benign but it makes comparing periods prior to this change to periods after the change difficult. The government regularly publishes the official rate but does not regularly publish the “apples to apples” rate.

  13. 13 Fred February 23, 2009 at 12:34 pm

    Thank you Robert. That does seem rather disturbing considering there are a lot of reports expecting unemployment to rise to 10% or more. Based on what you are saying, (that a 7.6% unemployment rate today is equal to 13.9% in terms of the depression era unemployment calculations) we could be at over 18% unemployment by the end of the year. That could put us into depression era unemployment figures in 2010 assuming we continue on a downward trajectory. Please tell me I’m wrong!!

  14. 14 JanA February 23, 2009 at 2:28 pm

    Your article should be front page “news” along with the political rhetoric whereof you speak. We need to be vigilant and consistently set the record straight as, for all we know, the new leaders are harping on an agenda with full knowledge that it could be harmful. I think they appreciate the counterpoint after all it is WE the people.
    Optimism is the key and intelligent comparisons such as you make. As for a depression that’s what you have when you are in a bad mood. What do you have when you are moving forward and in a good mood?!

  15. 15 rknakal February 24, 2009 at 7:09 am

    Hi Fred, Your concern is very valid. Most economists that I have spoken to feel that the unemployment rate will peak around 9% (I have heard 10% quoted by only a couple of them) which would lead to an apples to apples rate in the 15.5% – 16% range. The problem I have with taking today’s 13.9% number too seriously is that it is only an “estimate” which is subject to significant revision. There is no longer “official data” to base this estimate on. Let’s hope that job losses begin to decelerate.

  16. 16 rknakal February 24, 2009 at 7:16 am

    Hi Jan, Thank you for your post. I don’t think there is any downside to being optimistic provided you see things realistically and take prudent actions. I have a good friend who is having a very tough time in his business and as bad as things are for him, when I ask him how he is doing, his reply always is; “Bob, it could be a lot worse”. This is something we should all be mindful of.

  17. 17 Tom February 24, 2009 at 9:34 am

    It is refreshing to see someone looking at reality rather than fear mongering. Those of us who have been in the marketplace for more than a couple of decades have seen tougher times. Part of the problem as I see it is that those who have not been in the market through a difficult time have forgotten that business runs in cycles. There are ups and downs. You cannot have ups without downs, even if they are years and years apart.
    To me, it seems like Washington has forgotten what capitalism truly is. There is opportunity in failure. If we are to be the world’s strongest nation, then we must live by the mantra of ‘Survival of the Fittest’ not ‘Spreading the Wealth’ and ‘What’s Yours is Mine’. I don’t expect anyone to bail me out if I fail. I just pull myself up by the bootstraps and try again.
    What happened to good old hard work and determination?
    When did we become a nation of entitlement sheep?

  18. 18 rknakal February 24, 2009 at 4:14 pm

    Hi Tom, I agree with you. Unfortunately, political winds are swinging the pendulum away from the free market system at the moment. It is just a matter of time before the pendulum swings back.

  19. 19 Phil Seltzer February 24, 2009 at 7:17 pm

    “During the Depression, 10,000 banks failed. Thus far in this cycle, approximately 35 have failed with another 200 on the FDIC watch list.” Did all of the major banks fail? Absent I don’t know how many billions/trillions of dollars funded and to be funded by increased government borrowing, increased taxes and the printing of extraordinary amounts of money, all of our major banks would have failed or will fail.

    The Federal government caused this delightful situation , and it’s in the process of exaserbating it and will continue to do so. Barney Frank, Chris Dodd, Nancy Pelosi, Harry Reid with an Obama on top guarantees failure. Make no mistake about it.

  20. 20 rknakal February 24, 2009 at 10:42 pm

    Hi Phil, your comments are very interesting. The government can be blamed but I would focus in a different direction. in the early 1990’s, the government decided that a 62% homeownership rate in the country was not high enough. They targeted a homeownership rate of 75% and created stimulus to get there. Fannie and Freddie were instructed to buy any mortgage under the sun and the groundwork was laid for 3% downpayments and unltimatley 0% downpayments. These targets were the reasons why subprime and alt-A loans were created as lenders struggled to figure out how to create the number of mortgages that the government wanted. These initiatives created tremendous demand for housing and coupled with a period where the Fed kept interest rates too low for too long, a housing bubble was created and here we are today. That single initiative, trying to create a higher percentage of homeownership in the country, was the single most impactful catalyst for our present predicament.

  21. 21 Johnson February 24, 2009 at 11:34 pm

    An economic depression is typically defined as a period of recession lasting several years. Given the length of the current recession I agree that it is too early to label the downturn as a depression. It should be understood however that economic conditions do not have to be as dire as those experienced between 1929 and 1933 for the economy to be in a depression.

  22. 22 rknakal February 25, 2009 at 7:54 am

    Hi Johnson, Thank you for your post. The Great Depression actually consisted of two back to back recessions and from start to recovery lasted 11 years. Let’s hope this one does not last anywhere near as long.

  23. 23 Johnson February 25, 2009 at 4:13 pm

    Most historians would argue that the “Great Depression” ended in 1933 and that the Recession of 1937 or the “Roosevelt Recession” was a separate event.

  24. 24 rknakal February 25, 2009 at 10:37 pm

    Hi Johnson, I defer to the historians. I’m just a guy trying to sell some buildings.

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