Overshadowed by the euphoria over
Bernanke’s testimony last week was news that the Federal Reserve Board’s
index of industrial production fell
one-half percent in January.
That by itself is not that unusual. What makes it noteworthy is that this Fed index has been languishing for a while, and is now below its value of six months ago. That, too, can sometimes be benign. We saw a 6-month low in September 2005 after Hurricane Katrina, and in the anemic recovery of 2003. But a 6-month-decline in the index is something that is often associated with the early stages of an economic recession.
Figuring prominently in this decline were motor vehicles and parts, whose production index was down 6% in January alone. Here again some might be complacent about this on the grounds that autos have been sickly for a while. True enough, but as Econbrowser readers will be aware ([1], [2], [3]), over the last few months things have deteriorated significantly.
As I’ve also been saying on these earlier occasions, if the housing downturn gets no worse, that by itself should not be enough to cause a recession. Detroit’s woes are also not enough by themselves to cause a recession. But what about the two together?
Here’s what I think:
Technorati Tags: macroeconomics,
recession,
industrial production,
autos
wow, the painstakingly neutral and even-handed professor is hinting we might be in for a recession? given that your approach is not at all bombastic or politically motivated like some blogs – i am all ears.
One might caution that most of the historical data come from a time when manufacturing, mining, and utilities made up a larger slice of the whole economy — much larger, in terms of employment — than they do today. Arguably, the goods-producing sector (manufacturing, mining, and construction) is already in a recession, but the now more important service-producing sector seems to be humming along just fine.
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I’m glad that you’re on the job, Professor. Yep, it’s going to be a ‘fun’ year.
knzn, last week, retail sales for Jan. came in flat. Next week, we’ll see what total Consumer Spending is doing, but I’m guessing that, like retail sales, it’s not going to be pretty.
but the now more important service-producing sector seems to be humming along just fine.
You mean it “was” humming along fine. Some problems developing there as well.
But consider that the early indicators are once threatening inflation. The FED has held interest rates at a painful level though not an inflationary level – unless they persist over time. That is driving recession.
So consider the situation where we are in recession in the fact of strong inflation. Can you say “stagflation.” What does Bernanke do? If he raises rates to curb inflation he drives the recession deeper. We may be close to a time when the FED has to finally admit to the futility and failure of its interest rate methodology.
Of note from the FOMC minutes on manufacturing:
Participants reported some continuing softness in manufacturing, primarily in industries related to housing or automobiles. The recent slackness in manufacturing activity appeared to be largely an inventory correction, which participants expected would be completed this year. Participants noted that the tone of contacts in the industrial sector was generally more positive than at the time of the December meeting, and some survey information pointed to expectations of a rebound in manufacturing activity later this year.
I suppose (no arguabling for me) knzn’s
“Arguably, the goods-producing sector (manufacturing, mining, and construction) is already in a recession”
could be taken a few more steps.
Like “arguably, the Chrysler sector of Daimler Chrysler is already in a recession”
or “arguably, the service-providing sector of sub-prime loans is already in recession”.
Arguably, (irresistible is irresistible) lawyers are just emerging out of a recession.
I know this is near heresy, but what is it about this r word that moves us to such heights?
Professor,
I wonder if you are just as worried about the core CPI data that came out today? Gold prices also shot up $20. Could it be that inflation is a bigger problem than we all realize?
I wonder if Lacker is sending out his “I told you so” emails right now.
DickF:
I agree stagflation is the likeliest scenario.
With so many regional variances it is difficult to pinpoint the direction of the national economy based on industrial output, but for someone living in Michigan, the “dip” is more like “the bottom dropping out”.
Last year saw more consumer spending than earnings, ergo, we dipped into savings.
Now with the housing markets getting soft to tanking and home prices following (down 10-15% here), depending on location, home owners can’t feel too confident about dipping into their “equity”… especially with Dr. B’s higher interest rates translating into more expensive borrowing. That translates into less spending and less industrial production.
Inflation is not really the big worry now. We took the hit with oil prices last year and that has rolled its way through product pricing. This year looks like energy prices will roughly parallel last year, so we shouldn’t get another jolt there.
So, given business pullbacks, consumer pullbacks, higher rates of foreclosures, and a stubborn Fed chairman, yeah, we could be seeing some longer faces in the near future.
Meanwhile, Toyota could probably pick up Chrysler and Ford really cheaply right now. Or maybe Hundyai might be interested. Can you say “fire sale?”
From the ‘other’ dryfly…
The trouble with the services vs. mfg debate is that even IF mfg hires fewer people & is a smaller fraction of GDP than the past, a whole lot of activity in services starts with the purchase of a manufactured product… think marketing, financing, insurance, service, etc.
This is as true for the support of manufacturing plants as it is of the products they produce… manufacturing is a major catalyst driving lotsa down stream service activity which does not show up as ‘manufacturing activity’. If it slows it will leverage into a lot of other non-mfg sectors.
Bank on it.
“what is it about this r word that moves us to such heights?”
Experience.
As far as the UK’s concerned, stagflation’s a near certainty.
dryfly: “a whole lot of activity in services starts with the purchase of a manufactured product”. Yes, but the product isn’t necessarily manufactured in the US. It takes a lot of US service activity to support imports, too. And for that matter, with services increasingly globalized, the US can provide much of the “marketing, financing, insurance, service” even for products that never make it to the US. Granted, local manufacturing has got to have more impact on the service sector, but the differentce between 2% and 0% annual growth in the relatively small US manufacturing sector doesn’t seem like enough to make or break the service sector. My point is, though, that once upon a time, it probably was enough, so we have to be careful about interpreting indicators that had a different meaning historically than they do today.
Where along the way did higher oil prices become synonymous with inflation. While I am fairly certain higher oil prices and inflation are somewhat correlated, I think it is extremely misleading to suggest that higher oil prices cause inflation.
You might want to look at this together with quality spreads. Capacity utilization is a fantastic leading-concurrent indicator of quality spreads. Simply, when the economy weakens quality spreads widen making it difficult for sub-prime borrowers to obtain credit. So it is not just the industrial sector where this data has negative implications.
knzn – my point was that even though mfg is a small & shrinking percentage of GDP it drives WAY MORE activity in unrelated sectors than is apparent from statistics. That is why JDH is justified in raising concern.
Mfg is often one of the major ‘spear heads leading an economy into recession and conversely, also leading it out. Activity associated with capital investment & mfg driven services is a big part of it and only a small part shows up as mfging proper.
My grad school prof did a ten year study on this back in the 90s… while that is a long time ago much is still the same. Around 2000 he and a business reporter took the dry scholarly results & turned it into a readable book: Manufacturing Works, by Fred Zimmerman & Dave Beal.
Google it, it is worth the read. It also partially explains why our trading partners fight so hard to maintain their mfg base (or build one from nothing)… the impact is much larger on growth & growing prosperity than people realize and it does matter.
And while globalization is part of the story it still doesn’t change the basic theme.
This discussion has me thinking, “How much of an impact to inflation is national debt compared to the price of oil and corn?”
Can anyone provide some perspective on this?