The Next Great Depression Is Just Getting Started

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. Here's the chart I think everyone really needs to see...

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, is that the present rates of 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% annualized 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% (seasonally adjusted annual rate) 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 Euro-Zone nations, China and the UK. The sharpest falls in employment were signaled for Denmark, Spain, the US, Russia and the UK.

The Deflation Back-Slap: The Global Manufacturing Input Prices Index posted 31.3, its lowest reading ever. 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 Euro-Zone, Russia, Switzerland, the Czech Republic and Denmark.

And for anyone who is 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 a perfect mirror, but the correlation I would say is undeniable...

So never mind the depth, what about the duration? This is where I think things 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, probably), 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, but more likely a couple of years.

P.S. Death for Madoff. But first... OOGOO!