Deja Vu

Source: Eichengreen and O'Rourke (2009) and IMF

Another Great Depression? It is still to early to tell, but so far the current decline in global industrial output is closely tracking what took place 80 years ago (see graph above). Here in the U.S., we are running at less than two-thirds capacity. In fact, we are seeing a utilization rate last seen in the 1930s:

There will not be a bunch of new investment in industrial capacity until utilization gets back into the 80s. Meanwhile, employers appear loath to hire back laid-off workers. The average layoff has reached 24.5 weeks, a 60-year high:


Indeed, almost half of all displaced workers now collecting unemployment insurance will exhaust their benefits before returning to work (unless, that is, Congress borrows yet more money to extend the benefit period a second time). As a result, delinquent consumer loans, from credit cards to home mortgages, will likely increase, further pressuring the banks carrying those loans on their balance sheets.

Bank failures are becoming THE story in 2009. On Friday the Federal Deposit Insurance Corporation continued its weekly ritual of Whack-a-Bank, closing five more and bringing the year-to-date total to 45 (complete list here). Despite going on a hiring binge a year ago, the FDIC stills does not have enough bank examiners to keep up with the growing caseload. Thus, the implosion of the banking sector will play out in slow motion for at least the rest of this year--and probably beyond.

[update, July 31: The FDIC announced today the closing of five more banks. The total for 2009 now stands at 69, at least until next Friday.]

All of which makes the odds of an upside divergence in the topmost graph rather remote. [For a more detailed discussion of the headwinds facing the economy, check out John Mauldin's latest weekly newsletter--The End of the Recession?--and scroll down to The New Normal...]