Last week was a tough one for the optimists.
In addition to dreadful numbers for auto sales, last week the Institute for Supply Management reported that its manufacturing PMI index fell to 36.2 in November. A value below 50 indicates that more facilities are reporting deterioration rather than improvements in categories such as orders, production and employment. The index never fell below 39 in either of the previous 2 recessions.
ISM’s related index of business activity constructed from a survey on nonmanufacturing establishments fell to 33.0 in November. We don’t have a long enough track record of that index to know what it requires to get a reading that low.
But the real attention last week was on the loss of 533,000 jobs during the month of November reported by the Bureau of Labor Statistics on Friday. That’s a 0.4% drop, the biggest percentage drop in 28 years, and part of broader employment picture that Ian Shepherdson called “almost indescribably terrible.” Notwithstanding, Dave Altig did his best to describe it, perhaps as something not so terrible after all, by comparing the decline in employment since December with what was seen on average during previous postwar recessions.
By that measure, this looks a little worse than the average postwar recession, in part, Dave notes, because it’s already lasted one month longer than the postwar average. If you compare the current recession with the two longest and most severe postwar recessions (1973 and 1981), we’re maybe not quite as badly off now as we were then, at least if you trust the preliminary data.
But there’s another comparison we can look at along these lines that’s much less reassuring. One of the developments that helped get us out of previous downturns is that the Fed responded to the recession by lowering interest rates. The blue line in the graph below shows the average behavior of the fed funds rate in the months following the recessions of 1957, 1960, 1969, 1973, 1990, and 2001. I’ve left out the somewhat anomalous 1980 and 1981 recessions, in which rapidly changing inflation expectations played a key role. The red line shows the fed funds rate during the current recession. The Fed cut rates more quickly and farther this time around than in any of the other 6 comparison downturns.
Why does that trouble me? It means that the Fed did everything it could from the very beginning this time, and it wasn’t enough. The average fed funds rate in November was 0.39%, meaning that even if the Fed cuts its official “target” for that interest rate to 0.5% or even 0.25%, it’s not going to do anything for anybody. The main weapon we’ve always used in the past in this kind of situation is now out of bullets.
If a recovery begins soon, Dave’s diagrams indicate that this wouldn’t be regarded as all that serious a recession. But I see no signs that a recovery is about to begin.