U.S. Industrial Output Does The Time Warp

One of the traditional ways to define a Depression from a recession (or "deep recession," as some prefer), is to see 1) a minimum 10% decline in Gross Domestic Product, as well as 2) a recession which lasts over three years. We have argued previously that the United States has been in a recession since 1999 or 2000, so the second proviso is probably well exceeded. The first is more difficult to pin down, since the GDP numbers in the United States are typically manipulated for political reasons.

One can find reasonable proxies for GDP data in the news organs of the U.S., as well as Government data. As our co-writer has previously noted, retail sales were down an adjusted 9.2% (source, see Table 2) year-over-year from this past February.

Additionally, the latest information suggests that U.S. industrial output has dropped a whopping 12.8%, year-over-year this March. This is the lowest level of output since December of 1998; an entire decade of output has already been lost in the 2007 Depression, only a year and a half in.
Add to that the Federal Reserve's report that industrial capacity utilisation fell to 69.3%, the lowest level on record since recording began in 1967, and the economy is looking pretty grim indeed.

As it is industry, not retail or High Finance, which makes an economy functional, this drop is very troubling. It represents both serious unemployment, and - perhaps worse still - the destruction of productive capacity via lack of maintenance. We say worse, because although new workers can be trained by old workers, the knowledge is useless if the machines are unusable. It is exactly this in the oil industry: the longer prices stay down, the more capacity to meet future demands will be annihilated.

Whatever the case, though, the picture can be shaded even darker, as the Census Bureau suggests that, year-over-year in February, the drop was more like 14.8% (source, Table 2).

Considering all this information, we feel it is possible to give a hypothetical time-frame for the duration of this Depression. Assuming a 15% year-over-year drop in output, and also assuming that the economy will find an initial bottom after a 50% drop, we posit that the bottom will possibly be in about three years from now (as one additional year has already past). After that, we think a 75% drop-from-peak is probably the longer-term outlook, but that time-frame is not predictable at present.