(March 17, 2008) – The Federal Reserve Board released the Industrial Production and Capacity Utilization report for February this morning. Industrial production fell 0.5% in February after having increased 0.1% in January. Although almost 3/4 of the of the February decrease resulted from a weather-related 3.7% drop in output of utilities, the report was not good news.
Today’s crisis is not a GDP event, i.e., not the result of a slowdown of spending, building inventories, and production cutbacks and layoffs like the textbooks say. This time it is almost entirely a balance sheet, or capital market event.
Some people, who only see my TV spots, have the wrong impression of my current view of the economy. The spots are usually set up so some person says there is a terrible recession, then I say no there’s not a recession–end of spot. What I really want to say is that this is something different, and far more serious, than a recession. It is the total collapse of the information networks we call the capital markets.
The reason that’s so important is because different tools are required to fix a GDP problem than those to address an asset market collapse. Anti-recession policies, like the ones now being implemented by policy makers ($600 checks, etc.) will do no good at all. We need balance sheet fixes for today’s problem.
Balance sheet sheet fixes must be designed to repair the balance sheet problem–the inability of investors to understand, project, and trust the future cash flow streams embodied in securities. I will write more later about just what that means.
Output decreased 0.2% in manufacturing, .6% in final goods, and 1.1% in durable goods, 1.3% in automotive in appliances, furniture and carpeting. The only real bright spot were home electronics (+1.2%) and information processing (+1.4%). Total industrial production was 1.0% above its year-earlier level and 113.7% of its 2002 average. (click table below to enlarge in a separate pop-up window)
The capacity utilization rate for total industry in February fell 0.6 percentage point, to 80.9%, about equal to its 1972-2007 average rate of 81.0% but down from 82.0 in Q3/2007 before the mortgage crisis hit the headlines. Capacity increased 0.2% in February, roughly a 2.4% annual rate, slightly higher than the 1.8% recorded in 2007.
I have also included the historical charts for both Industrial Production (above) and Capacity Utilization (below) so you can compare what is happening now to previous difficult periods. The bars indicate periods of official recession, which more or less translates into declining GDP. As you can see, each time there is a recession there is a corresponding collapse of industrial production and capacity utilization. Last time it was the dotcom bust, before that the savings and loan collapse and Resolution Trust Corporation, before that the draconian disinflation of the early 1980’s, and before that the oil embargo in the 1970s.
I put the charts up so you could see that this one is different. Today’s crisis is not a GDP event, i.e., not the result of a slowdown of spending, building inventories, and production cutbacks and layoffs like the textbooks say. This time it is almost entirely a balance sheet, or capital market event.
Some people, who only see my TV spots, have the wrong impression of my current view of the economy. The spots are usually set up so some person says there is a terrible recession, then I say no there’s not a recession–end of spot. What I really want to say is that this is something different, and far more serious, than a recession. It is the total collapse of the information networks we call the capital markets.
The reason that’s so important is because different tools are required to fix a GDP problem than those to address an asset market collapse. Anti-recession policies, like the ones now being implemented by policy makers ($600 checks, etc.) will do no good at all. We need balance sheet fixes for today’s problem.
Balance sheet sheet fixes must be designed to repair the balance sheet problem–the inability of investors to understand, project, and trust the future cash flow streams embodied in securities. I will write more later about just what that means.
JR
