Recession Is Over, But Happy Days Have Yet to Return

It now looks as if the NBER will declare the recession formally ended right around now, or perhaps last month! The final piece of the puzzle fell into place with the Industrial Production (IP) and Capacity Utilization (CU) report.

Total IP rose by 0.5%, which aside from a hurricane-induced rebound in October was the first increase since December 2007, when the economy entered the recession. This is in sharp contrast to the year-over-year decline of 13.1%. In June, IP was down 0.4% and in May it was down 1.1%.

Production of final products was up 0.6% following a 0.5% decline in June and a 1.2% decline in May. On a year-over-year basis, final goods production is off 10.1%. Final goods are separated into consumer products and business equipment, and both rebounded.

Consumer Products rose by 0.6% following declines of 0.5% and 1.0% in the previous two months, and is off 7.2% year over year. Production of business equipment was up 0.5%, following declines of 0.6% and 2.1% in June and May, respectively. On a year-over-year basis this is down a staggering 17.2%.

Production of Materials was up 0.8% following declines 0.4% and 1.2% respectively, and is down 15.1% year over year. Only production of non-industrial supplies were down, falling 0.2% following declines of 0.1% and 0.8% in the previous two months and off 15.1% from a year ago. The big story in the turnaround was a 17.1% increase in auto production, which means that Ford (F) is doing much better.

Total CU rose to 68.5% from 68.1% in June and 68.3%. This is still an extraordinarily depressed level, and with the exception of the prior two months is the lowest since records started being kept in 1967. A year ago the economy was operating at 78.6% of capacity.

As a general rule, 80% is normal, 85% is a boom and 75% is a recession. Below 70% is just plain awful. Still, it is an indicator that historically has not given a lot of false positives, so the increase is highly significant. It also registered its first increase since December 2007, when it was at 80.6%.

To my mind, CU for manufacturing is even more telling than total CU, although they do tend to move together. Manufacturing CU rose to 65.4% from 64.7% in June and 65.0% in May. A year ago, factories were running at 76.1% of capacity. Prior to the current downturn, the lowest it had ever hit was 70.9% in December 1982. The nation's mines were operating at 81.7% of capacity, up from 81.0% in June and 92.5% a year ago.

Utilities were the only weak spot in the report, with CU falling to 77.9% from 79.7% last month and 83.1% a year ago. However, Utility CU is greatly influenced by the weather, and July was very mild, and hence less air conditioning demand than in a normal July.

The weather influence on Utilities (part of the total) is why I think that manufacturing CU is a better indicator than total CU. Capacity Utilization for finished goods rose to 67.2% from 66.4% and 74.6% a year ago. For crude goods, it rose to 78.8% -- a full point higher than the 77.8% last month, but well below the 88.7% of a year ago.

The chart below (from Caluculated Risk) shows the history of Capacity Utilization. Note the relationship with at the end of each blue (recession) bars. CU turns up right at the end.

Combine this with the overall fall in new claims for unemployment insurance, which are well off their highs of almost four months ago and it looks like we have finally hit bottom.

The end of a recession only means that we are at the point of maximum economic pain, not that prosperity has returned. We will probably still see unemployment continue to rise until the first quarter of next year. This will in turn should keep a damper on consumer incomes.

Combine that with the desire of consumers to save more of what they do earn in an attempt to rebuild their balance sheets, and you have very anemic consumer spending. This is why I would still avoid the retail sector, particularly mid-range retailers like The Gap (GPS) and Macy’s (M). Discounters like Wal-Mart (WMT) should fare better.

Even though the end of the recession does not mean that “Happy Days Are Here Again”, it is a cause for celebration. It will be a long and hard trip back, but at least it looks like we are now on the right path.

[click to enlarge chart]

Comments

[Roger Knights]

“Happy Days Are Here Again” was a hit song IN THE SPRING OF 1930.

The recession has ended; the depression has begun. (Debt-driven defaulting and delevering dominos.)

2009 Aug 17 04:55 AM

[j-dub]

What a relief!!!!
The recession is over!!!!! Today, so far, 6 guys on TV told me it was.
I just wish I still had my job or a decent chance to find a new one in the foreseeable future to avoid forclosing on my house, but NO ONE gets EVERYTHING they want.

BUT AT LEAST THE RECESSION IS OVER

2009 Aug 17 08:48 AM

[Jimbo]

Apropos of Roger Knights' and j-dubs' comments, allow this anecdote. In reaction to a letter-to-the-editor I wrote about unemployment and illegal immigrants, I received a telephone call from a man in my community who is a self employed plastering contractor. He can't get a job because the few construction projects still underway are employing illegal immigrants to do the plastering. "They do a good job and they work for less", general contractors have told my neighbor. My neighbor can't get unemployment because he says self employed can't qualify. I have given food to this man and his family. I am a retiree with fair income. I have tightened my belt like everyone I know. One of or sons, with a wife and three children, has been laid off from a technical job requiring considerable, but narrow, skill. I see the middle class being squeezed like nothing except the 1930s of my childhood. I believe BOTH political parties are going to get a nasty surprise in 2010 from insurgent candidates. This is why those "mobs" are a harbinger of the future.

2009 Aug 17 10:26 AM

[Glen L.]

The recession better end soon, Pollyanna needs a new pair of shoes.

2009 Aug 17 09:44 PM