Three Things Will Determine If There’s an Economic Depression

The U.S unemployment report for March foreshadowed the ugly numbers to come as the economy’s sudden stop sidelines entire sectors. The prospect of double-digit unemployment rates raises the possibility that what is now the “Great Suppression” will become the next Great Depression. This raises an important question for market participants: What separates a depression from a recession? A starting place is to consider the three “Ds” of a depression: Depth, duration, and deflation.

To be sure, the depth of the downturn during the second quarter will check one depression box. The lights were literally turned off in large parts of the economy. Output may fall by as much as 33% and unemployment may climb above 30%, according to estimates by the Federal Reserve Bank of St. Louis. While the exact numbers will only be revealed in hindsight, that there has been a collapse in economic activity is without doubt.