The head of the International Monetary Fund (IMF) recently told reporters that the world’s advanced economies -- the U.S., Western Europe, and Japan -- are “already in depression,” saying: “The worst cannot be ruled out.”

Is he right? Has the ultimate disaster scenario occurred? I think not. If you ask me, Dominique Strauss-Kahn’s comments were irresponsible and have more to do with his ambitions to obtain additional funding and expand the IMF’s influence than with economic reality. Let’s look at the facts.

For one, there is no commonly agreed-upon definition of what constitutes a “depression.” The only (relatively) recent reference point we have in the U.S. is, of course, the Great Depression of the 1930s. Between 1929 and 1933, gross domestic product (GDP) in the United States fell by almost half, with a 23.3% drop recorded in a single year, 1932. In 1933, the general unemployment rate reached 25%; among nonfarm workers the rate was close to four in 10.

Sure, blue-chip employers announced more than 30,000 new job cuts in the last week of January alone:


Number of Job Cuts (week of 01/26/09)

Pfizer (NYSE:PFE)


Caterpillar (NYSE:CAT)


Boeing (NYSE:BA)


General Motors (NYSE:GM)


Home Depot (NYSE:HD)


Sprint Nextel (NYSE:S)


Those numbers look awful in a headline, and the situation is no doubt distressing for those involved, but we need to remember that there are approximately 150 million people in the U.S. labor force. The current unemployment rate is 7.6%, and while I expect it to exceed 10% at some point, we are still very far from the horrific numbers recorded during the Great Depression.

In terms of GDP declines, the IMF’s own latest forecast, published at the end of January, looks like a hayride compared to the Great Depression:







European Union






On the other hand, perhaps the Great Depression is simply an extreme example of economic depression (it is called “Great,” after all) and we could be in the first stages of a milder one. Former IMF chief economist Simon Johnson says the term refers to a protracted contraction lasting around five years. By that token, Japan in the 1990s could be a recent example of an advanced economy stuck in depression.

If that is the standard, then I think the U.S. certainly runs the risk of being stuck in a depression over the next five years, but whether that occurs depends heavily on the government’s response to this crisis. However, even by this measure, it would be impossible to say that we are already in one, for the outcome depends on future actions and events. We (and that includes the head of the IMF) will only be able to say in several years’ time.

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Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. Pfizer is a Motley Fool Income Investor recommendation. Sprint Nextel, Pfizer, and The Home Depot are Motley Fool Inside Value recommendations. The Fool owns shares of Pfizer. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.