Paul and All. You might be interested in the following analysis I have prepared.
Are we in a recession or not? Clearly we are in slow times that could fester
into recession. There is also evidence that the manufacturing sector is suffering.
There is, in fact, a chorus of moans and crying about difficulties in the
manufacturing sector. Whether these moans and cries have more to do with the
value of stock options than they have to do with the real state of manufacturing
activity is a subject deserving of additional research.
So, let's take the manufacturing sector and examine industrial production
statistics closely for evidence of recession. In the last 30 years there have been
four "official" recessions. Two of them, 1974-75, and 1981-82, were deep
recessions. The 1980 and 1990-91 recessions were noticeable, but of short
duration, although it took the Fed some time to notice the latter one (a mistake
that the Fed today seems loathe to repeat, one could say, parenthetically).
Industrial production indices compiled by the Fed divide into four principal
categories: (1) consumer goods, (2) equipment, (3) intermediate goods, and (4)
materials. Roughly speaking, these fours components have weights of about 31,
19, 15, and 35 percent, respectively, in determination of the composite industrial
production index. The behavior of the composite measure and each of the four
components during recessions should provide us with consistent benchmarks for
judging current conditions.
The strategy for comparisons consists of four parts. First, find the time of the
peak level of production prior to a recessionary period. Second, find the trough
level of production, the low point recorded during the recessionary period. Third,
we measure the percentage decline in production by the various measures and the
length of time from peak to trough. Fourth, we compare the current decline with
these periods of "real" recessions for evidence of similarities. The results of this
exercise are shown in the following table:
Industrial Production in US Recessionary Episodes
Percentage Decline from Peak and Peak-to-Trough Duration
Period IP IPC IPE IPI IPM
'74-75 -14.8% -12.7% -10.3% -16.2% -19.3%
Nov-73 16 mos. 16 mos. 20 mos. 16 mos. 18 mos.
1980 -6.2% -3.6% -2.7% -7.9% -9.0%
Feb-80 6 mos. 5 mos. 5 mos. 6 mos. 6 mos.
'81-82 -10.3% -4.1% -13.9% -5.4% -13.8%
Jul-81 17 mos. 17 mos. 19 mos. 17 mos. 17 mos.
'90-91 -4.6% -3.7% -5.9% -6.1% -4.6%
Sep-90 7 mos. 7 mos. 12 mos. 7 mos. 7 mos.
'00-01? -2.1% -1.5% -0.7% -1.8% -3.2%
Sep-00 5 mos. 5 mos. 5 mos. 6 mos. 5 mos.
In this table, IP stand for Industrial Production and suffixes C, E, I, and M stand
for consumer goods, equipment, intermediate goods, and materials. The recession
years are shown in the first column and the high watermark month/year for the IP
index prior to the recessionary period is shown as well. We see, for example, that
in the '74-'75 recession, the peak month of production occurred in November,
1973. By the time that production had bottomed-out, manufacturing production
was down 14.8 percent, and it took 16 months to reach that trough in production.
Intermediate goods and materials suffered even larger declines. Note also that it
took the equipment sector 20 months to reach its nadir. The 1980 recession was
much shallower. The most sizable of the declines was in materials and its
magnitude of decline was less than half of the 1974-75 decline. And, it was over
in six months, making this about the shortest recession on record.
The 1981-82 recession followed close on the heals of the 1980 recession.
Officially the National Bureau of Economic Research, a group of economists
charged with timing peaks and troughs of recessions, have this recession
beginning in November 1981. The actual prior peak in production occurred in
July 1981. Whatever its date of beginning, before it was over output was down
10 percent and the equipment and materials components were down nearly 14
percent. Interestingly, consumer goods fell by only 4 percent. It took almost a
year and one-half to reach the low points. This contrasts greatly with the 1990-91
recession, where declines were scattered about the 4-6 percent range and, save for
equipment, only slightly more than half a year was needed to get production on
the upswing again.
These findings on the extent and duration of manufacturing production declines in
past recessions constrast dramatically with the current US downturn. Despite the
passage of a full five months since production peaks, total industrial production is
down only 2.1 percent, less than half of the decline recorded in the mildest of the
recessions in the past 30 years. Materials has suffered the largest percentage
decline of 3.2 percent, still comfortably above the decline experienced in the
1990-91 recession in that component. With certainty, the US economy is in a
slowdown. Yet, it is fair to say that from the perspective of manufacturing output,
that sector of the economy that has, thus far, been hit the hardest, data available to
date, through March 2001, indicates that this downturn remains simply a
slowdown, not a recession. Also, we are five months into this slowdown, a point
from which recoveries from mild downturns and recessions frequently occur.
The major question that follows from this analysis is "What is really bothering Greenspan?" |
