Manufacturing Collapse Reminiscent of Great Depression's Beginning

Well, here's the chart I think everyone really needs to see (below). The JPMorgan Global Manufacturing PMI hit 33.2 in December, a series record. More to the point, you can get a comparison between what is happening now and the 2001 "recession lite" with only a swift glance, and of course, the 2009 long recession is only just getting started.

click to enlarge

Now let's stick it alongside the one Paul Krugman put up last week of the US Great Depression:


Arguably, what we can see here is that the current collapse in industrial activity is starting to get near the US historic one in terms of proportions, but we still aren't quite there yet. What we could note that JP Morgan, in its monthly report, suggests that the present rates of global output are equivalent to an annual fall of between 12% and 15%. Really to compare with the fall in the US, we need to get up into the 20% region, but remember the global index is based on an average for 26 countries, and some of these are much worse than others (Japan, Spain, possibly Russia) and will already be around the 20% annual contraction rate in December. The point is also that the situation is still deteriorating, so hang on a bit, since it is not at all excluded that we will hit a 20% annualised contraction rate for the whole aggregate 26 sometime during the first quarter.

The second half of 2008 has been dreadful for global manufacturing and the sector enters the new year mired in its deepest recession for decades. Manufacturing will therefore continue to weigh on world GDP figures, with December PMI data consistent with a drop in global IP of around 12%-15% saar as indexes for output, new orders and employment slumped to record lows.

The weakest performance was registered by Japan, whose output and new orders indexes fell to levels unprecedented in the histories of any of the national manufacturing surveys included in the global manufacturing PMI.

Employment fell for the fifth successive month in December, and to the greatest extent in survey history. All of the national manufacturing sectors recorded a drop in staffing levels, most at series-record rates including all of the Eurozone nations, China and the UK. The sharpest falls in employment were signalled for Denmark, Spain, the US, Russia and the UK.

And watch out for the deflation backslap:

The Global Manufacturing Input Prices Index posted 31.3, its lowest ever reading. The rate of deflation was especially marked in the US, were purchase prices fell to the greatest extent since June 1949. Rates of decrease in costs hit series records in the Eurozone, Russia, Switzerland, the Czech Republic and Denmark.

And for those of you who are still skeptical that any of this has any validity, here's a PMI/GDP comparison chart for Japan - GDP rates to the left, diffusion index PMI readings to the right. Not perfect, but not a bad guide I would say, if you like your football live, that is.

So never mind the depth, what about the duration? Well, that is where I think that all of this will differ from what happened back then. As you can see in the US Great Depression chart, the 20% annual decrease went on for several years. At the present time I think there is no reason to assume that this will happen, i.e. that we will keep getting massive year on year contractions (in some cases maybe, Latvia perhaps?), but activity does look set to fall to quite a low level, and there is no strong reason at present for believing it will simply bounce back up again. More than likely we will simply trawl the bottom, at least for some months, and who knows, maybe a couple of years.

Well that's it for the big picture stuff, but I have actually been pretty hard at it all day down at the individual country level, so there is plenty more detail to come in forthcoming posts.

Comments

[Adam Pawling]

Good article Edward. I'm glad someone is discussing the manufacturing report.

Data points between Krugman's and JP Morgan would be interesting to see: from 1940 to 1980. I'm wondering how manufacturing fared in the 70s oil shock.

I'd also be curious to see data on inventory levels. One point I'm optimistic on is inventories are being drastically slashed- unlike in 2000 when firms were slow to respond. Even a slight pickup in demand may give a good bounce to manufacturing if inventories are very low.

2009 Jan 05 08:19 AM

[HayekSmith]

Your article provides a clear view of the current situation.

Throwing in a little history from this point in the Great Depression, FDR discouraged employers from hiring anybody by adding new rules, increasing taxes and sticking it to any entrepreneurs who wanted to start a business. "That great sucking sound" was the wealth of the nation being vacuumed to Washington D.C. with measures like the April 5, 1933 Gold Confiscation and the January 30, 1934 devaluation of our currency wiping out 41% of U.S. savings accounts in one terrible swoop.

When the Obama administration realizes just how far federal revenues have fallen, we'll see how much of the wealth gets "spread around" to private citizens and how much he really just wants to feed loyal government employees.

I agree, this economic cataclysm has just barely begun...

2009 Jan 05 08:45 AM

[{5U}]

Good points and I am pretty damn bearish but I dunno if this will be The Great Depression...I'm thinking Japan's Lost Decade but we'll do it better cause we are da USA

We'll just fok it up half as badly as Japan in the 90s...

2009 Jan 05 09:01 AM

[Boubou]

I am in the further gloom and doom camp also, but I realize that I tend to reinforce my views by selecting blogs which support it.
There are an equal number of blogs which tell us that today is 'the investment opportunity of a lifetime.'
The UBS chief something-or-other said these very words in 2001 and so I doubled down on the funds they sold me in 1999.
The funds all turned out to have swallowed the tech bubble so I lost half my retirement fund.
Not content with that disaster, I participated fully in this one as well.
Bonus is I lost half of much less money this time.
So i am very skeptical of the ' opportunity ' crowd.

2009 Jan 05 09:28 AM

[One Eyed Guide]

Good article. However, there is a reason to believe that things will bounce back much faster than in the Great Depression and that the economy will not "bounce along the bottom". If you read the conservative Austrian economist Rothbard's "America's Great Depression" you'll see that Hoover did a lot of policies at a comparable time (from 1929 to 1932, often blamed on FDR) that made the Great Depression worse. Paulson has done better (though still repeated some of Hoover's mistakes) and Obama seems to be advocating those policies that worked to pull us out of the Great Depression. If he actually executes a sharp rebound starting in the third quarter of 2009 is quite likely.

We'll see.

2009 Jan 05 09:47 AM

[AndrewBaker]

The ones telling us now is a great buying opportunity are probably the same ones who did not not tell us to sell 12 months ago: why would they be right this time? It strikes me that not saying sell and saying buy (selectively) are two sides of the same self-interested coin. Add in the politicians' economics (bad at the best of times), and the only way is further down, in my view. I'm sticking with shorts (through ETF) and bonds, and a very few stocks that I'll sell as soon as the price has risen. This is a depression and has a long way to go.

2009 Jan 05 09:58 AM

[Gem Hudson]

Yes the wealth of the dollar is in its capital money and capital money is earned money. You have sold what you have produced but selling only what they have produced is to earn the feudal lord master theirs and not your money. The wealth of the dollar is not just in the marketing. Dollar value is in the manufacturing also.

2009 Jan 05 10:12 AM

[hotforoil]

Deflation?

With the US printing money like it's going out of style, $us is going to fall off the table. We might even see hyper-inflation. Never mind the upcoming "Card Check" fiasco that will provide a`substantial boost of inflation as well. Holding cash? We will be lucky if it keeps at least half of its current buying power. Welcome to the new "Jimmy Carter" years!

2009 Jan 05 10:25 AM

[secmaven]

But the all seeing and all wise Market had already "discounted" worse news than this so that on the very day these facts were revealed a 258 DJI point increase was the result. The talking heads said "Investors" were returning to the crap tables. Let the Market be our guide and our God.

2009 Jan 05 10:49 AM

[Duude]

I don't anyone that can read Krugman without a grin on their face. Krugman always, always, always has an agenda. He isn't a credible guy. Some of you might point out that he won the nobel peace prize. Unfortunately, those who vote for the nobel peace prize aren't beyond politics. They voted for Krugman at a time when word had come out before hand that pickings for the economics prize were slim this year and the U.S. presidential campaign was in high gear. They actually based the award on work Krugman did 30 years ago. I'm not sure he even supports his prior work privately as he does publicly.
His recent article is a setup article for a turnaround in the economy. He can then later say, Obama Saved us! The truth is politicians aren't as powerful to change the course of the economy as many believe. They can screw things up, but fixing the economy often just takes time. Don't know what truly qualifies as a 'great depression'. If we need to see 20% unemployment and hold double-digit unemployment for 10 years as was seen in the FDR years, I'm not convinced at all. As long as we don't flip flop to hyper-inflation, I see an economic rebound as soon as late 2009, early 2010. That's hardly a depression and certainly not one that will be diverted by the great Obama as his time in office won't be sufficient to positively affect anything even if he could.

2009 Jan 05 10:57 AM

[axelrod608]

>> "an equal number of blogs which tell us that today is 'the investment opportunity of a lifetime.'" >>

It is important to keep in mind that it's not an either/or proposition. Many fortunes were made during the Great Depession. In ALL market conditions there are winners as well as losers.

Even if the economy tanks, there will be companies that do well. The challenge is to find the gems in the multitude of losers. The process never changes but the odds get slimmer as the economy gets weaker.

2009 Jan 05 11:26 AM

[notsosmart]

with unemployment rising & people have more stuff than they need(& still owe on ) i dont see how low inventories matter all that much.a housing supply of 12 mos or more will add to the downward slide.folks just dont want to know that the dj should never have been @ 14,000..all good things come to an end specially when based on liars loans & phony AAA rated paper.drive less,buy less(you have enough stuff) & pay your debts.pocket the interest in your pocket.its tax free income.wake up dumb-dumbs.

2009 Jan 05 12:48 PM

[Jonathan Christopher]

Axelrod has it right. Last year Buffet would not buy anything Americam. This year he is like a kid in a candy store. Fortunes will be made in this downturn. It could be a Depression - Enough mistakes have been made this year to move it in that direction. But the die has not yet been cast. And there will be winners and losers. Today is a down day?
My accounts are UP today.

2009 Jan 05 02:26 PM

[Meremortal]

Full disclosure, though I could be a liar (more on that below): I am a generalist and I have many years of investing and business experience, mainly in real estate sales, investing and development. I've been investing in stocks for about 35 years.
1. The writer is a victim of static model fallacy and his graph comparisons are not useful.
2. Krugman? No.
3. Despair is rampant but not unanimous yet, so we do have more downside ahead in stocks and the economy.
4. The recovery may be slow, but anyone predicting that at this point is guessing, not truly forecasting (given my reading so far, though I may have missed someone making a good case). I would maintain that conditions are too uncertain to predict. the speed of the coming recovery. I confidently predict a recovery, this is not the end of capitalism.
5. Our job is always the same. We must look for ways to grow/conserve our capital under current conditions, with an eye toward the future.
6. I'll not be giving any advice though I am actively working on my number 5. Anyone who acts based on poster comments is a fool. Do your own research and place your bets accordingly. I have been doing well, but that could change at any time.

2009 Jan 05 05:14 PM

[Chris B]

Manufacturing in the US is down?

What, did 3 of our 10 remaining factories shut down?

2009 Jan 05 05:27 PM

[Bad Dog]

Aren't inventories relatively small these days? The supply chain today is much leaner than it used to be. So it seems to me that reduction in demand at the retail end must translate into decreased manufacturing and imports pretty quickly compared to how it was in the 70's.


On Jan 05 08:19 AM Adam Pawling wrote:

> Good article Edward. I'm glad someone is discussing the manufacturing
> report.
>
> Data points between Krugman's and JP Morgan would be interesting
> to see: from 1940 to 1980. I'm wondering how manufacturing fared
> in the 70s oil shock.
>
> I'd also be curious to see data on inventory levels. One point I'm
> optimistic on is inventories are being drastically slashed- unlike
> in 2000 when firms were slow to respond. Even a slight pickup in
> demand may give a good bounce to manufacturing if inventories are
> very low.

2009 Jan 05 05:39 PM

[Bad Dog]

I am waiting for the next big round of bankruptcies to take place before I think of buying equities.


On Jan 05 09:58 AM AndrewBaker wrote:

> The ones telling us now is a great buying opportunity are probably
> the same ones who did not not tell us to sell 12 months ago: why
> would they be right this time? It strikes me that not saying sell
> and saying buy (selectively) are two sides of the same self-interested
> coin. Add in the politicians' economics (bad at the best of times),
> and the only way is further down, in my view. I'm sticking with
> shorts (through ETF) and bonds, and a very few stocks that I'll sell
> as soon as the price has risen. This is a depression and has a long
> way to go.

2009 Jan 05 05:41 PM

[Bad Dog]

You are full of crap. Krugman said in 2001 (!!) that the US economy was based on people selling each other houses with borrowed Chinese money. He was warning about this bubble economy a long time before you learned how to type, my friend. Why don't you actually go back and read his articles and books going back a decade. He was one of the few who has been pretty consistently right. I know you want to believe in the discredited BS of the Friedmanites that guided the GOP into its current position as the Party of the Confederacy. But those days are over. Krugman was right, and you and your fellow reactionaries have been spectacularly WRONG.


On Jan 05 10:57 AM Duude wrote:

> I don't anyone that can read Krugman without a grin on their face.
> Krugman always, always, always has an agenda. He isn't a credible
> guy. Some of you might point out that he won the nobel peace prize.
> Unfortunately, those who vote for the nobel peace prize aren't beyond
> politics. They voted for Krugman at a time when word had come out
> before hand that pickings for the economics prize were slim this
> year and the U.S. presidential campaign was in high gear. They actually
> based the award on work Krugman did 30 years ago. I'm not sure he
> even supports his prior work privately as he does publicly.
> His recent article is a setup article for a turnaround in the economy.
> He can then later say, Obama Saved us! The truth is politicians
> aren't as powerful to change the course of the economy as many believe.
> They can screw things up, but fixing the economy often just takes
> time. Don't know what truly qualifies as a 'great depression'. If
> we need to see 20% unemployment and hold double-digit unemployment
> for 10 years as was seen in the FDR years, I'm not convinced at all.
> As long as we don't flip flop to hyper-inflation, I see an economic
> rebound as soon as late 2009, early 2010. That's hardly a depression
> and certainly not one that will be diverted by the great Obama as
> his time in office won't be sufficient to positively affect anything
> even if he could.

2009 Jan 05 05:45 PM

[Trinitymaster]

The sad thing is that pathetic stocks like Best Buy, Ford, and Hartford are going up when they should be tanking even further.

96% of 401k's are about to be wiped out when people get back into the market and realize (way too late) that the Market is being manipulated.

The DOW should be at 5000 and not a penny higher.

2009 Jan 06 05:11 AM

[Russian Bull]

Another well written article. Thank you.

2009 Jan 06 07:58 AM