February 18, 2009
Industrial Production and Manufacturing Output, Compared
One can get an idea of how bad this recession is compared to previous ones at the St. Louis Fed's Recession Watch.
They haven't They've now updated the pictures to account for today's industrial production release (-1.8% vs. Bloomberg consensus -1.5%). , so I will convey the situation in two graphs. To sum up, industrial production is lower than at the corresponding point in any previous post-War recession. For manufacturing output, the same is true back to the 1973 recession (as far back as this series goes).
Figure 1: Log industrial production (Jan. 2009 vintage), normalized to 0 at peak. Current recession (blue), 1981 recession (black). Source: FRB via FRED II (accessed 2/18/09), and NBER.
Figure 2: Log manufacturing production (Jan. 2009 vintage), normalized to 0 at peak. Current recession (blue), 1981 recession (black). Source: FRB via FRED II (accessed 2/18/09), and NBER.
It is interesting to see how fast output has declined in the past six months; industrial production has declined 9.3% (in log terms) since 2008M07, and manufacturing production by 12.3%. The three month rate of decline (annualized, log terms) is 21.7% and 31.7% respectively. See Haver's coverage for more. The news from Empire State Index does not bode well for February. The Bloomberg consensus for the Philly Fed's Index is -26.0, less than last month's -24.3. We'll see if the news is worse than anticipated at 10am on Thursday.
[Update - 9pm]
Spencer at AB scooped me.
[Update 8:10am Pacific 2/19]
From Bloomberg calender, wherein actual Philadelphia Fed index came in at -41.3, vs. consensus -26.0 (and was far outside the range of estimates):
First the Empire State report and now the Philadelphia Fed's data show intensifying contraction in February, results that point to a step lower for the nation's manufacturing sector. The Philadelphia Fed's general business conditions index fell another 17 points to -41.3. Shipments, orders and unfilled orders also showed deterioration. Price readings, for both inputs and outputs, show increasing month-to-month contraction. But weakness, unfortunately was centered in employment which fell nearly 7 points to -45.3. The reading underscores the troubling rise in unemployment claims posted earlier this morning.
Posted by Menzie Chinn at February 18, 2009 08:00 PMdigg this | reddit
The 'cliff diving' shown in this graph seems similar to the 73 recession. I'm not real familiar with that era, any parallels? I'd bet NBER was slow calling that one too, given the slow decline leading to the abyss. Next time you show this graph, I'd like to 'see further into the future'
Posted by: JD at February 18, 2009 09:13 PM
JD: I don't know when NBER declared the peak associated with the 1973 recession. Industrial production does trough at 14% (log terms) below peak in that recession.
Posted by: Menzie Chinn at February 18, 2009 09:28 PM
I am going to repeat my predictions here just so that the record is thoroughly visible.
1) The recession trough, by NBER definitions, will be in Q309.
2) Jobless recovery persists into 2010.
3) Employment will ultimately bottom at 131M jobs (i.e. 3.5M more to be lost from this point on). The UE rate crosses 10%.
The funny thing is, my predictions for a recession totaling 20-22 months in duration and 7M jobs lost peak to trough is still widely derided as 'delusionally optimistic'. So even though my prediction accounts for the longest duration and biggest percentage job loss of any postwar recession, people here still soundly dismiss it.
I have been consistent, and will stick by my predictions.
Pessimism, too, is prone to bubbles. The pessimism bubble is close to peaking.
Posted by: GK at February 19, 2009 12:06 AM
The sharp plunge in 1974 was due to the oil shock. Once oil prices fell, the economy recovered just as quickly as it fell.
The 1957 recession seems weird. A very sharp drop, despite the fact that this recession is hardly ever mentioned as being noteworthy. It was a time of (cold) peace and prosperity, and is remembered fondly by anyone old enough to remember it.
Posted by: GK at February 19, 2009 12:16 AM
Actually, in 1973-74, 4 scary things happened at once.
1) Oil shock
2) Yom Kippur War
3) Watergate/Nixon resignation
4) US troops pulled out of Vietnam, ramping down defense funding.
Not to mention a coup in Greece and Turkey's invasion of Cyprus, as well as India testing a nuclear weapon.
At the same time, nothing major happened in 1957, yet 1957 was even more severe, by these charts.
Posted by: GK at February 19, 2009 12:25 AM
I hope you're right Menzies. Either I'm too stupid to narrow it down to one scanario or maybe it just seems too different from other post war US recessions to see it with that much certainty. I see three scanarios:
1. Best case. The government plans works well (or they bit the bullet and go down the bank reorg/nationalisation path)along with other stimulus and banking bailout plans worldwide. The world resumes solid growth in 12-18 months. Obviously the banking systems still got some issues and governments have large debts but nothing some gradual inflation and fairly low real interest rates can't fix over 5-10 years. Presumably China and India come out of this stronger than US and Europe and the opportunities are more in developing countries as the US and Europe have to stop leveraging up.
2. Deflation case. After the US come out of reccession in the next 12-18 months there's Japan 1990's style 8-12 years of slow growth, continued asset price deflation and high unemployment.
3. Inflation case. Scarier option of high inflation, double dip severe recession and loss of confidence in US dollar. If the US dollar looses safe haven status the Fed has to print money and so inflates. A lot of turmoil in currency markets as countries unpeg from dollar.
Until we see otherwise I think it's reasonable to assume that Menzies type of scanario (similar to my scanario 1) is the most likely. I'd be interested in anyone explaining to me why scanarios 2 and 3 aren't at least a 20% chance each. I blog on this at http://reflexivityfinance.blogspot.com/
The weird graph on that fedwatch site is the real income one. Real income has been going up the last few months. Does someone have an explanation for that?
Posted by: Steve van Emmerik at February 19, 2009 01:59 AM
There's an error in the statement "industrial production is lower than at the corresponding point in any previous post-War recession". Strictly speaking, industrial production is of course higher than at the corresponding point in any previous post-War recession.
Of course, you mean production relative to its peak, which is fine. I don't normally revel in pedantry. But it's occasionally comforting, mid-recession, to look at the historical context and remember that we are still much richer than at almost any before.
Posted by: Leigh Caldwell at February 19, 2009 02:25 AM
The industrial production drop-off looks comparable to '73 and to '57, both very severe recessions. Current contraction is ameliorated relative to those 2 recessions by lower fraction of overall economic acitivity being in manufacturing sector but is aggravated by a collapsing banking system.
Posted by: d4winds at February 19, 2009 04:16 AM
My guess is that real income is rising only because wages don't fall as rapidly as some other prices. The PCE index which they are using to adjust fell from 123.0 in 8/08 to 120.4 in 12/08.
They aren't using "core" PCE, so they are including food and energy in that. So if food and energy, as well as housing costs, are falling more rapidly than income, then real income will rise (....at least until we see more layoffs.)
Posted by: acerimusdux at February 19, 2009 06:37 AM
You are delusionally optimistic. But you have plenty of company. Negative GDP growth will continue for all four quarters of 2009. Visibility into 2010 remains limited but I am hoping for growth in the 1Q of 2010 (based on no facts whatsoever.)
Posted by: Rajesh at February 19, 2009 07:02 AM
From an Investor view and not an economist view.
We ship our Jobs out of our Country to make aging Hippies Happy. Then we snivel about no Jobs as we try to drive an economy with Consumers.
We ask our Blue Collar work force to compete with third world labor inside of their own Country as we demand these folks do not default on their homes or snivel about the decline of their school system.
In California. We cry because we have a 46 Billion Dollar debt but spent 5 Billion a year to support illegal immigration over the past decade.
Just a few thoughts.
The models are already out there to fix this mess. Reinventing the wheel is not the way to go.
Posted by: Dave Johnson at February 19, 2009 07:38 AM
Thank you for this. It is sad information but important. I will not shoot the messenger. :-)
Posted by: DickF at February 19, 2009 07:59 AM
Home,commercial construction along with new auto is the main drivers for what is left of manufacturing in America. No surprise that this dip would occur the only shock will be its long term length and the use of taxpayer funds to fuel further conversion for robotic automated manufacturing both here and abroad.
Posted by: ron at February 19, 2009 08:19 AM
Actually, in 1973-74, 4 scary things happened at once.
Just four scary things?
- US incessant bombing of Cambodia and Laos until August 1973, which led to Khmer Rouge gathering storm towards genocide.
- Bombings in Northern Ireland, England and elsewhere in Europe.
- The Israel incursion into Beruit
It was a very scary place around the globe, indeed.
On the upside:
Secretariat won the Triple Crown and
The Paris Peace Accords were signed in '73.
Posted by: Eliza488 at February 19, 2009 08:28 AM
Given that this recession looks like it might be deeper or last longer then the others in your chart, do you think the automatic stabilizers will be less effective? Today, California is being forced to cut spending and raise taxes, which sounds like the opposite of a stabilizer.
Perhaps the political landscape was darker in the 1970's, but the economic situation today is on a darker trajectory.
I learned in school about the collapse of Penn Central. That is nothing compared to Bear Stearns, Lehman, AIG, TARP... etc.
Posted by: MikeR at February 19, 2009 09:14 AM
How much do the demise of the Auto companies (GM, Ford, and Chrysler) figure in to this? The 2007 recession has this added burden which the other recession did not. I wonder what those graphs would look like if the Autos were removed?
Posted by: Tom at February 19, 2009 09:38 AM
Actually, in 1974 the NBER called the start of the recession very early and was roundly criticized for doing so.
In 1974-75 there was a wide spread belief that it was actually two separate recessions. One was around Xmas 1974 and by spring the economy appeared to be rebounding. Going into the fall the consensus economic forecast was for stagnation-- 1-2% real growth, 8%-10% inflation. the second leg down in the fall of 1974 caught virtually everyone by surprise.
But in the summer the NBER was widely criticized for acting too early and calling the start of a recession when now it looked like the economy was avoiding a recession.
Posted by: spencer at February 19, 2009 10:32 AM
I don't know what you are using to determine your predictions but I am not sure you have cause and effect right. If it were a natural business cycle then why is it the greatest we have seen since the Great Depression?
I will join those who say you are 'delusionally optimistic.' The cause of the economic downturn is the government and what we see is the Obama administration making almost exactly the same mistakes as the Bush administration only on a grander scale. I have little doubt that the worse things get the more we will see of the Bush/Obama cure and the more sick the patient will become.
Posted by: DickF at February 19, 2009 01:23 PM
I see that the groupthink crowd that says I am 'delusionally optimistic' can't come up with any alternative predictions of their own. Not one of them has offered anything of substance regarding when they think the trough arrives, or what level job losses ultimately mount to.
I see no reason to revise my forcasts, which are already for the most severe recession of the last 60 years.
Posted by: GK at February 19, 2009 01:46 PM
For example, someone who thinks that their prediction will be better than mine ought to be brave enough to commit to numerical details.
My prediction is Q309 NBER trough/131M jobs at bottom/UE rate of 10%.
An alternative that is more pessimistic would be something like Q110 NBER trough/129M jobs at bottom/UE rate of 12%.
But I don't see any of the pessimism groupthinkers putting for any actual numbers. This is why I think the pessimsim bubble is near peaking - it has become irrational.
Posted by: GK at February 19, 2009 02:18 PM
I do not know how to give you the numbers you seek when I do not know how much money will be stolen from the private sector of the economy to be spent by the Government.
Is the spending over yet?
What I can do is tell you how to make this economy worse. Do part of what Bush did and continue doing what Obama is.
I can tell you how to fix this mess. Look at examples of JFK, Reagan, Bush I and yes even Bush II.
I can tell you this. After a meeting with Bankers Monday telling me they want MORE buy downs to live up to their obligations from before this mess. They told me there is LITTLE stimulus in this and the Pork and Spend Bill is nothing more then a pay back for Obama being elected. I can tell you they want for me to give then ALL of the money from a 5 year lease about to be signed and they are not allowing me to keep enough to pay the taxes on it.
I can tell you how much of this mess happened. But I am no fortune teller about the future. I have been ripped off and lied to by Investment advisors just like the next guy.
So aside from Gold and maybe TIPS or Corp. Bonds. Where to hide now? Oh, and I am not busting your chops. You have good info. In your posts but I for one need some solutions.
Posted by: Dave Johnson at February 19, 2009 06:33 PM
has anybody plotted this stuff against defense spending? I remember Eisenhower and his speech about the military industrial comlpex and the cold war was a weird time.
I also remember well the oil crisis in the 70's.
Come to think of it, the oil price rise might be seen as the straw that broke the camiels back. of course the housing crisis was coming but as a trigger it really started the rapid unwinding. It was sort of like a fuse to the bomb we are now experiencing.
any comments on the above? a non-economist wants to know.
Posted by: Joe Magner at February 19, 2009 08:44 PM
Steven van Emmerik: I think you mean you hope GK is right. I did not provide a forecast in this post. It is well known that GDP and income have continued to rise post 2007Q4; I suspect that GDP will be revised downward. National income does peak at 07Q4.
Leigh Caldwell: Yes, you are correct. Thanks. Although I will point out that as of January, industrial production is only 2 percent higher -- and manufacturing output only 1 percent higher -- than the corresponding point in the previous recession. Hence, by February, it is very likely that both series will be lower than it was in the corresponding point in the recession in absolute levels. So in that respect, your statement will soon be rendered inoperative. And indeed, the January levels are already below the peak values recorded in 2000.
MikeR: Yes, the quasi-balanced nature of state budgets does operate like an anti-automatic stabilizer. That is why the transfers to the states in the stimulus bill is such an important component.
Posted by: Menzie Chinn at February 19, 2009 09:06 PM
Thanks d4winds and Menzies Chin both spot on. Yes Menzies my mistake GK made forecast.
Posted by: Steve van Emmerik at February 19, 2009 10:02 PM
Hi Menzie and folks around,
in addition to your great fig. 1, a proper visualization for TARP can be found at CR :
Posted by: John Lee at February 20, 2009 02:42 AM
"Presumably China and India come out of this stronger than US and Europe and the opportunities are more in developing countries as the US and Europe have to stop leveraging up."
I'm sure there will be more 'opportunities' in developed countries, but the constant canard that no matter what happens, seemingly, China and India will always come out ahead of everyone else has a good chance of being run through.
Posted by: PM at February 20, 2009 08:04 AM
John Lee, that "visualization" of TARP is great.
PM, I think China comes out weaker than people expect. The US consumer and banks are in trouble, but not US corporations. US companies outsourced capex to china. Where is all the excess manufacturing capacity? Not in the US. They will have to deal with all the idle steal mills and textile factories.
Posted by: MikeR at February 20, 2009 09:26 AM
MikeR: It seems to me that according the Fed's surveys, capacity utilization is substantially under normal rates, as discussed by CR.
Posted by: Menzie Chinn at February 20, 2009 10:17 AM
Is there any way to account for the "bump" in IP in roughly April '08? Dead car bounce coincidence? Or effect of Bush Rebate II?
Posted by: Buzzcut at February 20, 2009 10:31 AM
When I re-read my post, I realized I sounded too extreme.
What I meant to say is this: The US is facing a devasting recession and we have lots of spare capacity. Over the past 10 years, US corporations have underspent on capex because of cheap labor and available capital in China. Therefore, some of the downside for the US is going to be forced on China, which will have a larger GDP output GAP.
Recently, the US has seen imports of Chinese steel spike (see today's WSJ) since they have relatively more excess capacity.
Posted by: MikeR at February 20, 2009 10:42 AM
MIkeR: Understood; I concur that the movements in US capacity utilization are probably less marked than would be the case if export-oriented capacity hadn't been built in China.
Posted by: Menzie Chinn at February 20, 2009 11:14 AM
Recessions do seem to be rather symmetric meaning this sharpness of a downturn may result in a hard bounce from an overcorrected position. The oil collapse helps this. GK may be right though I don't know where the growth will appear from.
Posted by: Lord at February 20, 2009 12:37 PM
Note that I am only timing the trough (Q309), and the number of jobs at the ultimate employment bottom (131M). I am not making any calls about the incline of the recovery trajectory. I am saying that the recovery will be 'jobless' into 2010.
Posted by: GK at February 20, 2009 01:00 PM
MikeR...you raise an interesting point about capex and Chinese excess capacity. They might have a harder time dealing with the situation. From what I've read, the downturn has caused a lot of political unrest so this downturn could spark some major changes over there.
But I"m not sure I understand why US Corps would spend their $$ in China because China has capital. Why would Chinese $$ be used for US Corp capex? Are you saying, the US Corp borrowed the money? Also, if US Corps spent their money (earned or borrowed) on a plant in China.....now idle.....wouldn't that negatively affect the US Corp??
Posted by: bruce at February 20, 2009 03:30 PM