March 17, 2008

Recession Watch

We now have a negative month for industrial production. As you can see in the chart below, the Feds Total Index was down 0.5% in February. Much of the decrease in February resulted from a weather-related drop of 3.7% in the output of utilities. In the manufacturing sector, output decreased 0.2% in February, and declines were fairly widespread across industries. But moving in the counter direction was mine production, which was up 0.4%.

The last U.S. recession ran from March through November 2001. The production index declined in four of the five months pre-recession, with one flat month. The monthly declines were between 0.4% and 0.7%. Production declined for six months during the 2001 recession with the month-to-month declines ranging between 0.3% and 0.7%. It is not rare for there to be a month-to-month decline during periods of economic expansion. In fact, the Fed’s production first fell for three months in a row from September through November in 2006, and the U.S. economy was still able to avoid a recession.

Over the past four months, the progression has now been +0.4%, +0.2%, +0.1%, and -0.5%. The entrance of a negative monthly number, even if overstated due to weather-related issues, greatly increases the odds that a nationwide recession began in the first two months of 2008. In mid-February, Fed Chairman Ben Bernanke said that the U.S. will avoid a recession. At the end of last week, the National Bureau of Economic Research’s — NBER is the arbiter of recession — CEO Martin Feldstein said that a U.S. recession “is not a sure thing.” Mr. Feldstein concluded by saying that “a recession in his judgment is more likely than not.” It would appear that upcoming analysis from both Fed Chairman Bernanke and NBER CEO Martin Feldstein will lead to a more negative conclusion.

Tags: depression, Fed Chairman Ben Bernanke, Feds Total Index, Feldstein, National Bureau of Economic Research, production levels, recession