Charting the current US downturn
My colleague at the Council’s Center for Geoeconomic Studies — Paul Swartz — has been tracking how the current US downturn stacks up against the typical post-War War 2 downturn.
The answer isn’t pretty. The fall in US industrial production for example already exceeds the typical fall in a recent downturn, and looks set to exceed the the worst fall in the post Word War 2 data. The dotted lines in the following graph are defined by the best and worst data points at this stage in the economic cycle in the post war data, and right now the fall in industrial production is very close to setting a new low.*
The scale of the fall isn’t a surprise to Dr. Eichengreen and Dr. O’Rourke.
Paul also plotted the current downturn against the trajectory in the 20s and the 30s. That also doesn’t make for pretty picture. But best as Paul can tell, the fall in US industrial production now isn’t quite as bad as in the 1930s.
Is there any good news? Yes.
The US isn’t making the same macroeconomic errors as is it made in the downturn than became the Great Depression. The US, for example, has implemented a large fiscal expansion to support demand far faster now than back then. But make no mistake, Paul’s charts leave little doubt that the current downturn is — on nearly every measure — as bad as any downturn since the Depression. That is the fundamental case why governments need to be taking bold actions now to slow the fall in global activity.
Do check out his updated charts, and let me know what you think.
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* I asked Paul to plot the drawdown in industrial production now v the drawdowns in industrial production over time. The current drawdown isn’t (yet) quite as large as the large as the drawdown in the mid-70s (the first oil shock). But it is also isn’t over.
His chart also clearly illustrates how, until recently, volatility in industrial production seemed to be falling over time. The great moderation, alas, is now clearly over.
The US isn’t making the same macroeconomic errors as is it made in the downturn than became the Great Depression. The US, for example, has implemented a large fiscal expansion to support demand far faster now than back then.
Fiscal expansion is still called “public deficit” outside the US. For some reason. In view of the type of use of the money at US federal level, not a chance to improve on anything except possibly rescue a couple of hundred jobs in Wall Street.
Even bonus-free, those compensations are over the top and certainly no more a smarter use of money than the current level of military spending.
Good luck to our honest “middle class” counterparts in this derailing country.
America is certainly not what is used to be. This unique finance blogosphere is one of the few things that can help you keep confidence vis-à-vis the US.
Keep on the good work. And please try to transform it into a political force. It should.
China expanding “Yuan” Currency Economic Sphere across Southeast Asia at expense of US Dollar hegemony
http://www.sinodaily.com/2006/090408084124.cmxuid0w.html
China said on Wednesday it was in talks with unnamed Southeast Asian nations on currency swap agreements after signing a string of such deals around the world.
“Some ASEAN nations have proposed and are discussing with us similar arrangements,” Assistant Foreign Minister Hu Zhengyue told reporters.
Beijing has recently signed or expanded swap deals with Malaysia, Indonesia, South Korea, Belarus and Argentina.
Such arrangements ease liquidity trouble as they boost the amount of Chinese yuan that banks in the other countries can draw on while servicing local companies that use the currency when trading.
China has said such deals were aimed at bolstering bilateral trade and investment to promote economic growth, while providing short-term liquidity to stabilise financial markets.
Hu also said China and Southeast Asia were on track to complete a free trade agreement by next year.
“The two sides have reached an understanding to complete a… free trade agreement by 2010. It seems that it will be concluded smoothly and on schedule,” he said.
China’s Export Engine Shows Signs of Life
http://www.cnbc.com/id/30099865
Over the past half year, the global financial crisis has wrenched asunder the gritty factory towns in China’s Pearl River Delta, but some signs on the ground suggest the workshop of the world is cranking up again.
The slump is not over for the area that churns out a third of China’s exports. Many executives estimate that a collapse in orders, mainly from the United States and Europe, has wiped out 20-40 percent of their business.
Greg Baker / AP
——————————————————————————–
Thousands of factories in low-margin sectors have closed, and the government’s latest guess is that 23 million migrant workers have lost their jobs.
But at least the nightmare scenario of widespread social unrest now looks increasingly unlikely. And industrial Darwinism has left leaner factories poised to take up the slack when the West rediscovers its appetite for cheaply made Chinese goods.
“Generally we believe that we’re probably at the bottom and that it’s stabilized,” said Steve Smith, general manager of Measurement Specialties which makes sensors for an array of automobile, industrial and medical applications.
The other very good news is that because of FDIC we’ve had fewer bank failures and no massive loss of savings.
It all sounds good, When demand comes back China starts exporting again. Well, my view is that by the time demand comes back in the West, its a certainty that the Chinese currency will be much stronger than now and have decoupled from the USD. The Chinese are certainly sparing no efforts to make their currency stronger and convertible.
Hence, when demand returns, it will no longer be profitable to export from China anymore.
@Twofish
Thanks to FDIC, the multi-billion dollar bank failures (Indy Mac, WaMu, Wachovia) have not resulted in large losses by depositors; bank shareholders and bond holders of WaMu have lost billions. Whether the FDIC and its tiny Deposit Insurance Fund can keep its record intact for the remainder of the downturn remains to be seen.
Brad, you can not compare the US now, to the US back in the 30’s. If you need to compare the US now it is to the UK in the 30’s. Is the present US fiscal stimulus bigger than the one in the UK back in the 30’s ?
It’s always easier to spend your way out of crisis when you can borrow easily in your own currency and your currency is used for international trade.
Also how do Chinese fare now in fall in industrial production ? In government reaction ?
My bet is China now is worse than US back in the 30’s and US now not that better than UK back then.
Also protectionism takes new forms, but it is coming back.
Also, Brad, do you think we could have an update on all the dark matter phenomenon.
Has it gone away ?
How are the comparative profitability of US/ foreign stocks ?
My bet is that all has reversed cause US stock market are less volatile than foreign ones.
Everything remaining the same
A testimony to the present fed head as the grahics show the speedy execution of his undertakings and positive effects, but
US federal deficit with larger negative slope than in 29.
Inflation inflexion point coming sooner.
The positives feed back
unemployment is affecting the service industry and not damaging the industry.
May be non farm payroll should be ploted togather with industrial payrol
Causation and causalities may introduce an other chart
The indebtness
Private public credit over GDP throughout the same period.
The graphs you didn’t include above are really striking: the global trade collapse, the spiking unemployment, non-farm payroll. The ISM graph is in line with all the other predictive measures, which say the future looks really sucky.
The graphs are really cool and I love the additional context of best-worst dotted lines.
The quickness of the downturn is directly a function of information processing that allows business to respond more quickly and efficiently. No one should be surprised at this.
the global trade collapse is striking and it should be really striking once we get solid q1 09 data.
Brad,
While it’s certainly true that the monetary and fiscal response has been much more dramatic, there are some signs that some of this may be counterproductive.
China is spending a lot supporting manufacturing, exports, shipbuilding, commodities and even industrial investment at a time of severe over-capacity.
And much of the spending here seems to be to encourage already heavily indebted consumers to borrow more than they would otherwise.
What happens if after 2 years of this, the fiscal and monetary policies have prevented a much more pronounced collapse, but the American consumer’s debt-to-income has risen and excess industrial capacity around the world has likewise increased? A second dip then would be REALLY bad…
Yes the second diiip would be bad but the new gamming committee will vote the credit events as no events (according to FX needs), toxic assets as healthy and stable (according to brand new models), AIG will get replaced by combination of FDIC & GF and the new secretary was just prevented from blocking the Fed custody holdings` (planned) transfer to his account. Just in case.
Any idea that bank liquidation may be possible?
http://cop.senate.gov/reports/library/report-040709-cop.cfm
Bob_in_MA: China is spending a lot supporting manufacturing, exports, shipbuilding, commodities and even industrial investment at a time of severe over-capacity.
It really isn’t. The stimulus is being directed at railroads, middle/low income housing, and health and education. There is excessive overcapacity at somethings. Wild undercapacity at others.
Bob_in_MA: What happens if after 2 years of this, the fiscal and monetary policies have prevented a much more pronounced collapse, but the American consumer’s debt-to-income has risen and excess industrial capacity around the world has likewise increased?
If you have unused industrial capacity then just print money to wipe out debt, which is more or less what the Fed is doing right now.
without a doubt, latent issues amongst non-financials will boom like fungi after a rainstorm.
will the massive shoving of federal umbrellas n raincoats unto the financial markets alleviate the woes of the masses?
will the credit flow smoothly from the federal coffers to that of the end consumer? US GDP has a big (60%?) component based on domestic consumption.
will confidence, or expectations (economist speak), a difficult to measure and equally difficult to control factor be restored?
without a doubt umployment and layoffs will creep higher..we are already past the peaks since 1984..if this time is worse than before..logically breaking higher should be an issue of time.
somehow, i feel money has become a nominal thing. whats important now is expecations, a rare commodity in current times.
It’s quite likely there will be a double dip, because none of the underlying issues have been resolved. Once the various stimulus programs fade, that will be more clear.
The yuan swaps are more a form of investment than a new international currency. It’s protecting their export sector while also finding somewhere else to put their money.
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