Monday, January 12, 2009

Nonexistent WMD V: Industrial production and Capacity Utilization

After Lehman failed and “credit markets froze” in the second half of September 2008, many people proclaimed that a second Great Depression would unfold. A few days ago, I explained how payrolls did not collapse as some had been predicting in late September and early October.

During the first days of October 2008, it was claimed that the frozen credit markets would especially paralyze businesses. Now that a couple of months have passed, let’s look at industrial production and capacity utilization (two measures of business activity that are available monthly) as measured by the Federal Reserve. The charts below show industrial production (measured as a index) and capacity utilization (measured as a percentage of full capacity) for each of the months of second half of 2008 (December data not yet available). Both fell in and again in September, and have remained higher than September in the months since.

The Lehman Brothers investment bank failed on September 15. The bank was deeply intertwined with other financial institutions – its failure to pay its obligations put its creditors at risk – and brought the credit crisis to its crescendo. By the end of the month, the intense financial chaos motivated Mr. Obama and others to warn that banks needed lots of money from taxpayers, or else businesses and consumers would get hammered. Because the bailout bill took time to pass, and then additional time for the Treasury to design and execute its $700 billion Capital Purchase Program (CPP), no bank received any money from the Treasury pursuant to the CPP until the last couple of days of October. Thus, if the warnings were right, business production should have suffered dramatically in October.

Industrial production and capacity utilization may put too much emphasis on manufacturing and thereby give a noisy picture of the overall economy, but we were promised disastrous results -- and thus results that would be obvious even in noisy data.

Politicians from both parties alarmed the American public at the end of September and in early October in order to justify spending $700 billion of taxpayer funds on a bailout of United States banks. I previously showed three measures of October and November activity that were by no means disastrous by comparison to previous months. Above are two more.

No comments: