The Industrial Recession Is Narrow, Meaning No General Recession

by: Bill Conerly

Industrial production is down, according to the Federal Reserve's latest statistics, but don't conclude that the country as a whole is in recession. Unlike recessionary downturns, the current slide is concentrated in just a few sectors, many related to the energy industry. A recession, by definition, is a widespread downturn in economic activity - what we have now is a narrow, but steep, downturn.

The actual decline in overall industrial production is less than we saw in past recessions - but just a little less. (Reminder: The U.S. had recessions in 1974, 1980, 1982, 1990, 2001 and 2008.) Josh Lehner calculated the number of sectors declining over a 12-month period, shown in the chart below.

indprorecgraph 2

The conclusion that we don't have a lot of breadth in this industrial slowdown is confirmed by the Fed's diffusion index computed over six month periods, as well as over three months and one month. (A diffusion index measures how many subcomponents of a total are rising and how many falling.)

The manufacturing sector with the largest decline in production over the past 12 months is primary metals, which includes pipes used in petroleum drilling.

Too much complacency would be unwarranted, just as too much pessimism is unwarranted. Our economy is interconnected: the knee bone is connected to the thigh bone, as the folk song tells us. A decline in one sector always has damaging impacts on other sectors, but not always so damaging as to pull the entire economy into recession. Given the strength of the consumer and housing markets, a recession is unlikely in 2016. Nonetheless, contingency plans for a recession are in order, especially so for those companies somewhat connected to the energy sector.