Thursday, May 21, 2009

Industrial Production In and Out of Recession

Industrial production plays a key cyclical role

Industrial production is more cyclical than the economy on average. That is, it falls further during recession and jumps more during recovery. The current recession started in January 2008 (with the prior expansion peaking in December 2007). How does this manufacturing recession compare to recent recessions? Is this the worst manufacturing recession since the end of World War II? And which industries have been hit the hardest and which have fared the best?

Different cyclical patterns

Recent recessions have followed different patterns. Thus far, the current recession in manufacturing is most like the 1973-75 recession. However, the 1973-75 saw an upturn in manufacturing 19 months after the peak. With one major auto producer in bankruptcy and another likely, it is not a good bet that manufacturing in this recession will begin recovery by July. Adding to this improbability is the downturn in exports, falling demand for construction supplies, and no pickup in consumer demand.

Both the 1990-91 and 2001 recessions were shallow and relatively short. It is interesting that the Fed has cut interest rates even more this recession than during the 2001 recession but the economy has responded less this time around. This speaks volumes on how different the current recession is – being more of a credit crunch than a simple downturn in demand and output.

The two years of data for the 1980 recession looks like a roller coaster. Not only did the 1980 recession (induced by oil price shocks to a large degree) end quickly, but it also fell back into recession within that two year period (including a portion of the 1981-82 recession) due to extreme Fed tightening.

Overall, there has not been any typical recession in manufacturing going back to 1972. But the current recession certainly is worst thus far and even is likely the worst since the end of World War II.
The hardest hit industry by market groups is consumer autos, down 34.5 percent since the end of expansion. Housing pulled down output sharply for appliances, furniture & carpeting, down 24.8 percent, and construction supplies, down 22.6 percent. On the business side of market groups, transit equipment fell 21.1 percent over the recession.

Some industries actually have not been touched much by the recession. These have been nondurables. One industry – energy – even posted a net gain of 1.7 percent over the 16 month recession period. The nondurables groups that fell little were chemical products, down 2.9 percent, and food & tobacco, down 3.2 percent. But demand has fallen for clothing and paper products with output for those groups down 14.9 percent and 10.0 percent, respectively.

Bottom Line

Indeed, the current recession for manufacturing is the worst in decades. Traditionally, the industries hardest hit during recession often rebound the most during recovery. Is that likely this time? With credit more restricted, the auto sector may not make as much of a comeback as is typical – even with interest rates so low. Tighter credit standards may cause construction industries to lag this time – notably those related to building new housing. But when home purchases do pick up, industries such as carpeting and appliances may do relatively well because they can improve along with existing home sales. Finally, if overseas economies – especially in Asia – rebound soon, we could see a rise in output for industries such as transit, industrial equipment, paper, and chemicals. Every recession and recovery in manufacturing has been different and that will likely be true this go around, too.

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