Comparing 2016 To The 2001 Industrial Recession

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Includes: AIRR, FIDU, FXR, IYJ, RGI, RINF, SIJ, UDN, USDU, UUP, UXI, VIS, XLI
by: Hale Stewart

I have two templates for the current US economy. The first, as I wrote last week, is the 1986 50%+ decline in the price of gas. The second blueprint, for whether the current industrial downturn will turn into a general recession, and if so for how long it is likely to last, is the 2001 recession. In that recession, GDP barely suffered at all, and consumer spending went sideways rather than down - although spending on houses and cars did decline somewhat. Rather, it was business spending that suffered. Further, a surge in the value of the US$ was a harbinger of the onset of that recession.

So let's compare the broad trade weighted US$ (blue in the graphs below) with manufacturers' new orders (red)

Here is 2001:

The US$ continued to increase in value against other currencies right on through the recession, while new orders plummeted more than 10% going into the recession.

Here is the present:

The US$ has surged even more, but manufacturers' new orders have barely turned negative even at their worst.

Now let's take the same graph, but this time measure the change in the US$ YoY:

In 2001, new orders turned positive as soon as the US$ decelerated to growing under 5% YoY:

The big one-month downturn thereafter was unfortunately due to 9/11.

Presently, the broad US$ as of its last measurement was still up 8% YoY, but with growth decelerating. If it follows the path of the US$ against major currencies, its YoY growth should have decelerated further since then:

Next, let's take a look at producer sales (blue) and inventories (green), and compare them with the ISM manufacturing new orders index (red). I have chosen wholesalers' data, since retailer data is generally flat, and there was a secular downturn in manufacturing inventories as they turned to a "just in time" system, that is much less evident in wholesalers.

Here is the 2001 recession:

And for completeness sake, here is 2008-09:

Here is the pattern:

  1. New orders decelerate (the series turns down but still shows expansion, then turn negative.
  2. Sales decline, while inventories continue to grow.
  3. Inventories decline.
  4. New orders accelerate and then turn positive.
  5. Sales turn positive (the recession ends).
  6. Inventories stop declining and turn positive.

Where are we in that series now? Here's the current graph:

  • New orders have decelerated, and briefly turned negative.
  • Sales have declined.
  • Inventories have started to decline.
  • In the last month of data, new orders turned positive.

I would like to see several more months of new orders data, but if they remain positive, that suggests sales should shortly bottom out.

So if our current industrial downturn follow the pattern of 2000, we still have a few months of negative industrial production readings and producer sales to go, but if the current trend in new orders and the US$ continue, the industrial recession should make a bottom then.

New Deal Democrat, XE.com