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.

What a Depression Means

It is difficult to clearly discuss the 2008 Depression when 'depression' has an unclear definition. Building upon our earlier post about the 1929 Depression, today we will begin to look at some effects the 2008 Depression will have. We hope that this gives you, Reader, better insight into what is happening economically. This will serve as a foundation for later posts, when we will look at things you can do to thrive in this Depression.

First, we must make one thing very clear: there is nothing anyone can do to stop a depression. A depression is a natural action of any economy, and is a necessary thing from an economic standpoint. It will simply happen for any number of reasons, and when started must run its course, whatever that may be. Despite claims otherwise, no depression has ever been 'stopped' by any concerted effort, either by individuals or governments.

Simply put, a depression is an out-of-control freight train barreling down the mountain. The only thing you, Reader, can do is to try and get out of its way. There is no sure way to do this, though: the freight train may jump the tracks and plow right into you, even though you're running as fast as you can away from it. A depression, like the freight train, is unstoppable, destructive, and unpredictable.

With this analogy in mind, let's take a hard look at how it applies to the 2008 Depression. Nothing is safe, nothing is certain. You cannot assume that something will be unscathed by a depression: not your job; not your pension; not your investments; not your home's value; not even your money in the bank. Any number of these, or all of them, may fall prey to the 2008 Depression, and there is nothing that anyone can do to prevent it. If you have some privileged status, such as posessing a private fortune or being a highly paid professional, don't assume that this will protect you. Judging from history, the overall loss of income (wages, profits, etc. ) can be expected to be somewhere in the neighbourhood of 50%. Some will loose all their income, most will take substantial hits, although a fortunate few will even see an increase. However, things could be better, or worse, since a depression is unpredictable.

What you can do, however, is be alert and ready to make changes in your life at a moment's notice. Also, it is better to plan ahead than simply react after the event. What would you do if you lost your job, and couldn't replace it? What would you do if your pension went away? What would you do if your credit cards were all unusable? We realise these are all hard questions, Reader, but they must be asked. Although the answers will be painful, they are the most important pieces of information you can have in the 2008 Depression.