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.

Approaching the 10% Decline

Although there is no single, consensus definition of what a Depression is, one widely accepted marker is a 10% contraction in the GDP. So far, by official numbers, this is still a ways off in most countries. But it is getting harder to fudge away the increasingly obvious.

March retail sales in the USA were reported yesterday having declined 9.4% year-over-year. This is now the fourth month in a row of sales declines in the vicinity of 9% year-over-year. Granted retail sales aren't the whole economy, but they are a fair proxy for the economy.

We don't expect this crash level of sales declines to continue - although it is possible - but it won't take too much longer for this shrinkage to put the economy into deeply red territory for the year. As we have stated before, we expect the Depression to continue for years. Even if there are a number of "growth quarters" sprinkled here and there (and we do expect them), the contraction should prove relentless.

For some time forward there will be a recovery bias to all reports about the economy. The drivel coming out of the Federal Reserve System is especially illustrative. It is going to take a while for it to sink in that things are bad, getting worse, and not going to recovery quickly.