Don't Say the D Word

It was only on the first of December that we finally got formal permission — from the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) — to call what the U.S. economy is experiencing a recession. Just a few days later, after the Labor Department announced that U.S. employers shed 533,000 jobs in November and 1.2 million since August, some were agitating to ditch the R word and replace it with the more ominous D one. "Shall we call it a depression now?" asked former Labor Secretary Robert Reich. "The threat of a widespread depression is now real and present," argued the University of Maryland's Peter Morici.

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It's a little hard to know what to make of such portentous statements, given that there is no agreed-upon dividing line between recessions and depressions, and no descriptive word in between. "It's a recession when your neighbor loses his job," Harry Truman once quipped. "It's a depression when you lose yours." What Reich and Morici seemed to be groping for — other than media exposure (mission accomplished!) — was a way to express that the current downturn may be a more serious phenomenon than other recessions of the post–World War II era. (See pictures of the recession of 1958.)

In terms of length, this recession already looks likely to break the postwar record of 16 months set in 1973-75 and equaled in 1981-82. The NBER has deemed December 2007 the start date (because that's when employment peaked), and it's very hard to find anybody willing to predict that the economy will resume growing by May. As for severity, though the first eight months of the recession were quite mild, the pace of job losses since August is beginning to rival that of the big 1970s and '80s recessions. So while President-elect Barack Obama and others who dub this the worst downturn since the Great Depression don't have definitive evidence just yet, they're not blowing smoke either. (See pictures of the stock market crash of 1929.)

There's a yawning gap, though, between the recessions of the 1970s and 1980s — when gross domestic product fell 2% to 3% and the unemployment rate rose 4 percentage points — and the conditions of the early 1930s. During the Great Depression, the economy shrank more than 26% over four years. The unemployment rate rose from about 2% to 25%. There are a lot of good reasons — the activism of the Federal Reserve, payments from Social Security and unemployment insurance that act as economic stabilizers, and the incoming Administration's plans for big-time fiscal stimulus — to think that won't happen again. But there are also good reasons — mainly the Depression-like breakdown of much of the financial system over the past 16 months — to worry.

All this makes forecasting the economic future even harder than it usually is. "It's not a science," says Kurt Karl, head of economic research for the insurance firm Swiss Re's American operation. "A lot of it comes from historical experience, and this is a time for which we don't have a lot of good historical parallels." Karl sees continued sharp economic contraction and big job losses for the first half of next year, then a recovery. That's close to the consensus view at the moment. That doesn't mean it's right.

Another, less hopeful possibility that gets discussed a lot is the decade-plus malaise Japan fell into in the 1990s after financial and real estate bubbles collapsed there. Then there's the less well known but more encouraging Scandinavian experience of the early 1990s. Sweden in particular is now held up as the model for how to restructure a busted financial system. How did that work out for the Swedish economy? It shrank for three years running, from 1991 through 1993 — ending up 4% smaller before it began growing again.

Intuitively, this Swedish model seems like a plausible enough scenario for the U.S. today — what Reich calls a "Mini Depression," or what one commenter on my TIME.com blog has dubbed the "Great Recession."

We won't know until it actually happens. A crucial aspect of every recession is the interplay between expectations and economic reality. For a time, gloomy expectations drive consumers and businesses to cut back, deepening the recession and making everyone even gloomier. Just like now. But at some point those expectations become so dire that the real economy begins to surprise on the upside, and the way is cleared for recovery. In early October, pollsters commissioned by CNN, after describing the economic conditions of the Great Depression, asked respondents if a return to such misery was likely. Almost 60% said yes. And perhaps one of these months, be it in 2009 or 2010, these people might just be pleasantly surprised by the economy's performance — and start buying stuff again.

Read stories of people who lived through the Great Depression.

See pictures of the global financial crisis.