Going Down Fast

Four important economic reports today show the real economic downturn is worsening very rapidly.

The Federal Reserve reports [1] that industrial production plunged 2.8 percent in September following a plunge of 1.0 percent in August. The plunge in industrial output in September is the worst one-month loss since December 1974 as the first OPEC oil-price hike devastated U.S. industry. Part of the September shut-down was the result of Gulf Coast storms, but even with the far greater devastation of Katrina, output fell only for one month and that was a 1.8 percent decline in September 2005. 

Indeed, industrial production (which includes mining and utilities as well as manufacturing) has now plunged in seven of the past eight months and by 4.5 percent yr/yr. Over just the past three months (July to September) U.S. output plunged by 3.8 percent; again the worst three month plunge since early 1975 and one of the worst in U.S. history. Manufacturing output plunged by 2.6 percent in September, the worst one-month plunge since May 1980, when the Federal Reserve slammed on the monetary policy brakes, sending interest rates skyrocketing. Manufacturing production has fallen in six of the past eight months and by 4.8 percent year over year.

Over the 82 months of the current business cycle, industrial and manufacturing output growth have been the weakest since the cycle that began in 1927 and roughly one-fourth the average cyclical strength for all industrial output and one-sixth the average strength in manufacturing. (See charts below.) [2]

Even as the U.S. continues to import more than $125 billion of manufactured goods each month, manufacturing firms within the U.S. now have over one-quarter of their existing productive capacity sitting expensively idle. This means there will be very little new business investment so long as consumer spending remains extremely weak. 

T. Boone Pickens, Sen. John McCain and now Sen. Barack Obama are wrong: Even now, the U.S. transfers more than three times as much wealth abroad to import foreign-made manufactured goods [3] as to import foreign crude oil.  As I have noted in each of these past 82 months, this historic weakness in production was substituted for unsustainable debt with the inevitable consequences of the economic and financial train wreck that is now playing out.

That the unsustainable must stop is a shock only for those debt-industry “triumphalists” who relentlessly ridiculed the need for production and earnings.

The Bureau of Labor Statistics reports [4] today that plunging gasoline prices in September offset soaring food and health care costs, leaving consumer prices (CPI-U) unchanged in September. Year over year, consumer prices remain up by 4.6 percent but will be stagnant or declining in coming months as the recession becomes far more severe.  Even with consumer prices unchanged, the BLS also reports [5] today that price-adjusted average (not median) weekly wages fell slightly again in September (by 0.04 percent) and are now down 2.5 percent year over  to levels lower than in 1999 and up just 0.07 percent since January 2001. Although the sharp polarization in wages and incomes is almost certainly being reduced during the current crisis, median wages are certainly falling even more rapidly than average wages. 

Another BLS report today [6] shows that their already deeply recessionary 4-week moving average of first-time claims for unemployment benefits rose again to 483,250 last week.  Plunging production and falling wages even for those that remain employed, together with the falling number of jobs and the sharply falling value of household assets means that the much hyped “deleveraging” of unprecedented household debt is NOT occurring. Indeed, incomes and asset values are falling far faster than household debt is being written off, leading to INCREASED leverage of debt to income and debt to assets. Household finances face unprecedented and worsening stress and will be cutting back spending while struggling to pay their bills and preserve savings for many months to come.

No one who has read my notes over these past many years should be surprised by current conditions. Still, these are scary and unprecedented times without the strong, informed leadership that is so urgently needed.