Las Vegas Sun

July 20, 2017

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Road from recession to depression is long, winding and far off

It’s always a little unsettling to ask a serious question and have the answer come back as a joke, as if you’re in an old gangster movie and the chuckle comes just before someone clubs you with a revolver.

Here, try it.

Q: When does an economic recession turn to depression?

A: “The old joke is: A recession is when you lose your job, and it’s a depression when I lose my job,” said Richard Sylla, an economic historian at New York University’s Stern School of Business.

Another economist, hours later offered the same line. In fact, it’s such a popular one that Ronald Reagan used it on the campaign trail during the 1980 election.

But this is serious. The Southern Nevada economy has been in a recession well into a year now, experts say. Unemployment keeps climbing, soaring the way 401(k) statements did before the stock market crash.

The region’s other indicators are also taking a turn for the worse — and those do not fully account for cuts by Harrah’s and MGM Mirage the Las Vegas Sun reported Saturday. The companies have eliminated the equivalent of 3,000 full-time jobs on the Strip.

Is there a chance this economic downturn could become something worse? When does the R-word become the D-word?

Turns out, there is no easy answer.

Economists at the National Bureau of Economic Research, the privately run think tank that serves as the arbiter of the nation’s economic health, employ a fairly strict formula of economic indicators for determining when the nation is in recession.

But they decline to do the same for depression. They most they will say is that a depression is “a particularly severe period.” Other economists suggest a “more severe recession,” with deeper woes and longer pain.

Indeed, many economists think the nation will never endure a depression as it did in the 1930s because “we learned so much from the last one,” Sylla said.

With the birth of macroeconomic theory and the deployment of sophisticated fiscal and monetary policy in ways President Hoover never tried, economists and lawmakers think they have the ability to fix the breakdown.

Of course, that was before financial wizardry and a complicit federal government began dismantling some of those tools and creating methods of sidestepping others.

Now, the nation is in the worst economic shape since the Great Depression. So how would we know if we’re edging into another one?

Here is what we know about the ingredients of a recession, and what it would take to morph into something worse.

A recession is popularly defined as two back-to-back quarters of decline in the gross domestic product. We just had one of those quarters, a third-quarter drop in the gross domestic product announced last week, and this quarter is looking just as bleak.

The National Bureau of Economic Research uses a longer formula, which also considers monthly snapshots of unemployment, personal income, sales and industrial production.

Nevada economists use that formula, too, but tailor it to match the regional economy, swapping gaming revenue and visitor volume for industrial production and personal income, said Keith Schwer, director of the UNLV Center for Business and Economic Research.

By those measures, the Nevada economy is in the tank.

The state’s 7.3 percent unemployment rate hasn’t been this high in 20 years, driven in Southern Nevada by the collapse of the real estate market under the weight of bad loans.

Homebuilding has plummeted and commercial construction is lagging as developers struggle to secure credit when banks are reluctant to lend.

Tourists are less inclined to gamble away a weekend on the Strip — maybe they’re getting enough action watching the stock market — so visitor volume and gaming revenue are dropping. Spending is down as credit card companies rein in easy money and families can no longer use escalating home equity as an ATM.

Schwer said Nevada has been in a recession since October 2007 — an assessment echoed by Moody’s chief economist, Mark Zandi, who said in January that recession had come to Nevada.

So how long and deep do the bad times have to be before a recession becomes a depression?

During the Great Depression, the nation saw the GDP plummet by more than one-third from 1929 to 1932. One in four workers were unemployed during the early 1930s, as unemployment hit nearly 25 percent, and remained in double-digits for several years.

But in fairness, that was a Great Depression. What about a Merely Decent Depression?

Some economists will venture a definition, suggesting that a depression could be defined as a 10 percent drop in GDP or a sustained double-digit unemployment rate.

“We still have a long way to go,” Schwer said.

Yet Nevada’s economic health is expected to get worse before it gets better.

The state is not likely to emerge as quickly as it did from the post-9/11 downturn or the decline of the early 1990s, the one that reminded politicians “it’s the economy, stupid.”

Experts have predicted an 8 percent unemployment rate ahead for Nevada, and Schwer said 10 percent unemployment is on the way.

Nevada hasn’t seen joblessness that high since 1982 and 1983 — those bad times Reagan foreshadowed on the campaign trail.

“The excesses of the past have seeded a series of recent bewildering events ... leaving a trail of bitterness and disappointment,” Schwer wrote in his October outlook. “These weaknesses are not likely to be quickly corrected, suggesting to me that 2009 will be pretty much a down year.”

No wonder economists prefer the levity of the joke over the reality of the answer.

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