Industrial Production: The U.S. Economy Was Already Heading For A Recession
The Federal Reserve released data on industrial production for March 2020 and there is little doubt left that the United States economy has begun a period of economic recession. But, do the data point to the possibility that the US economy was already heading for a recession without the advent of the coronavirus pandemic. And, if so, could the addition of the pandemic impact to the economic downturn make the recession even worse?
An economic recession is recorded when the economy has two full quarters of negative growth for real Gross Domestic Product. It is possible, although I don’t think it will be the case, that the first quarter measure of real GDP could be down from the fourth quarter of 2019. If it is, then a recession could be declared for the first half of this year if real GDP drops in the second quarter from the first. Otherwise, the recession would start in the second quarter and then go into the third quarter.
Industrial production dropped by 5.4 percent in March 2020 from February 2020.
This represented a major, historical drop.
Year-over-year, industrial production in March 2020 was down 5.5 percent.
The worst performer was in the area of business equipment… capital expenditures… which was down 8.6 percent from February 2020 to March 2020, but was down 12.6 percent from March 2019.
Given the figures on unemployment claims and retail sales and other prominent statistics going into the middle of April, there is no doubt that the downturn is getting much more serious.
This would mean that the period of economic recovery beginning at the end of the Great Recession ended after ten and three-quarter years. This is the longest period of economic expansion in United States history.
Longer Run Picture
The recovery, itself, was not that robust. During the period of expansion, the US economy grew at a compound rate of 2.2 percent. Although this was the longest recorded period of economic expansion in the United States history, it was also the economic expansion that experienced the slowest growth on record.
Yet, there were many other good things that came out of this period. For example, over the past few months, the unemployment rate in the United States was around 3.5 percent. This was the lowest the unemployment rate had achieved in over fifty years.
There have been many reasons given for the slow growth, and I have written quite a few of them, and we probably really won’t know why the growth rate was so modest during this period. Still, this era has been pretty good for most people.
The growth rate of industrial production has followed the growth rate of real GDP relatively closely during the past decade, with the compound rate of growth of industrial production for the whole period coming in above the compound growth rate of real GDP.
The growth rate of industrial production, however, moves much quicker than does the growth rate of real GDP so that short-term movements in industrial production can drop below real GDP indicating that a recession is on the way.
Comparing Real GDP Growth And The Growth Of Industrial Production
In the first quarter of 2020, industrial production was 2.1 percent below the level of industrial production in the first quarter of 2019. The first quarter of 2019 was 2.9 percent above the level of industrial production in 2018.
So, year-over-year, industrial production is showing a decline in the first quarter.
Since we don’t have the first quarter figures for real GDP, we have to look back one quarter to develop a comparison.
The fourth quarter of 2019 was 2.1 percent BELOW the level of industrial production in the fourth quarter of 2018. It looks as if the US economy could already be signaling that it was heading into a recession, WITHOUT the onset of the spread of the coronavirus.
Note that year-over-year, the growth of industrial production was 0.2 percent in the third quarter, it was 1.2 percent in the second quarter, it was 2.9 percent in the first quarter, and was 2.9 percent in the fourth quarter of 2018.
So, the growth of industrial production was slowing down throughout 2019.
As for real GDP growth, the growth rate from the fourth quarter of 2017 to the fourth quarter of 2018 was 2.5 percent and the year-over-year growth for the fourth quarter of 2019 was 2.3 percent.
Conclusion: The United States economy has been slowing down for the past two years. Typical behavior in an economic slowdown is that the growth rate of industrial production begins to drop and then falls below the growth rate of real GDP.
This happened from 2018 through 2019. So, the growth rate of industrial production was falling in 2019. The growth rate of real GDP was dropping as well.
In the fourth quarter of 2019, the year-over-year growth rate of industrial production was negative and then in the first quarter of 2020, it became even more negative.
Question: Was the US economy heading into a recession after ten years of economic expansion, even without the coming of the coronavirus pandemic?
One could make the argument it was, given how the relationship between the growth of industrial production and the growth of real GDP mimicked past history.
What Happened To The Capacity Utilization Rate?
The numbers on capacity utilization support the argument just made.
In the fourth quarter of 2018, capacity utilization came in at 78.6 percent. In the first quarter of 2019, capacity utilization dropped to 77.8 percent; in the second quarter, it dropped to 77.6 percent; and in the fourth quarter, it fell to 77.2 percent.
In March 2020, capacity utilization was at 72.7 percent.
The United States economy was losing strength throughout 2019 and the problems connected with the spread of the coronavirus just exacerbated the downward trend!
This information, I think, gives a whole new twist to the economic dilemma of the United States. It looks as if the US economy was heading for a recession in 2020, even without the breakdown connected with the pandemic.
It will be interesting to see what the figures for first quarter GDP are.
But, this conclusion raises a major question: If the economy was already heading for a recession, will that make a recession connected with the coronavirus even that much worse?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.