John Kemp

John Kemp's Profile

Manias and panics – here we go again

June 5, 2009

Like a party of drunken millenarians not sure whether to anticipate rapture or apocalypse but certain they are on the brink of something big, financial markets and commentators lurch from one extreme to another – absurd over-optimism to doom-laden pessimism.  Reality is almost always more prosaic.  Economic history is about “muddling through”. 
The Black Death (1348-1351), to take perhaps the greatest catastrophe to befall Europe, carried away a third of the population, but two thirds survived, and somehow life went on.  The Great Depression cut U.S. manufacturing output in half between 1929 and 1933, but still left plenty of factories working — albeit on severely reduced time.  Cars were still produced, crops harvested, and a few houses and factories built. 
Bread lines and work camps make better copy than thousands of people somehow struggling to cope and survive.  But they are only part of a more complex reality.  While John Steinbeck was the greatest reporter of the Depression, the bleakness of “The Grapes of Wrath” is only one part of rich heritage that includes characters coping in straitened circumstances in “Cannery Row”.  
Financial history is about the highs and lows, exuberance and panic.  Social and economic history is about the middle ground, continuity as much as change. 
At the moment, markets are seized by the excitement of “green shoots” of recovery.  Not for the first time, participants are in danger of losing perspective. 
While the pace of decline has slowed in North America, Western Europe and Japan after the free-fall contraction of Q4 and Q1, manufacturing activity is still shrinking. Even if the economy hits the trough in the next 1-4 months, as expected, and a recovery begins, it is likely to be fitful and uneven. 
The attached chart on rail freight volumes in the United States (a good proxy for manufacturing and construction activity) provides some indication of the continuing difficulties.  
Freight volumes are still trending lower.  The year-on-year deficit has widened from -14% at beginning of Mar to -18% at the beginning of Apr, -21.6% at the beginning of May and -23.5% at the start of Jun. 
While a recovery is coming, it is not here yet, and the trajectory when it comes is anything but certain.