There is a real risk that the worst financial crisis since the 30s will lead to the sharpest global downturn since the 1930s.

From EconomPic Data. Here we go:

"ISM Manufacturing Below Expectations

ISM sinks again to 32.4, well below expectations. ISM reports:

Economic activity in the manufacturing sector failed to grow in December for the fifth consecutive month, and the overall economy contracted for the third consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

In December, none of the manufacturing industries reported growth.

Take a look at new orders and pricing... yikes."

Now the WSJ:

"Economists React: Manufacturing Weakness Seen in Every Sector

The U.S. manufacturing sector index ended 2008 on a grim note, according to the ISM. The December report was weaker than expected and the weakest since June 1980. The Institute for Supply Management reported Friday that its manufacturing sector index came in at 32.4 during December, from 36.2 in November and 38.9 in October. It had been expected to stand at 35.4. A reading above 50 signals expansion in manufacturing; below 50 signals contraction. Below, economists react.

Much weaker than expected report, with the composite index falling another four points to 32.4. Lower levels than this have only been seen in a handful of months during the 1980, 1973-75, and 1948-49 recessions, and the key orders and production gauges hit record lows. The manufacturing sector is clearly in the midst of one of its worst downturns ever. … The weakness in December was nearly as broadly based as it could be, with not a single sector reporting growth. – Morgan Stanley Fixed Income Economics

The price paid index plummeted to 18, the lowest since June 1949 and the third lowest ever. That fully two-thirds of the respondents reported pay lower prices for supplies in December than in November underscores the seriousness of the deflation threat now confronting the economy. The global scope of the recession now underway has undermined an important prop for the U.S. economy, in general, and the manufacturing sector in particular. – David H. Resler, Nomura Economic Research

Robust export demand had been the main support for U.S. manufacturing for many months. Now, with economic activity weakening sharply in many of the United States’ main export markets, exports have begun to drop, with the pace of decline set to accelerate significantly in the months ahead. – Joshua Shapiro, MFR Inc.

This echoes the readings on manufacturing activity from Europe, where a December survey of European purchasing managers fell to 33.9—underscoring the global nature of the economic contraction. – RDQ Economics

Overall, the ISM data … suggest we may see the deepest recession since the early 1980s, and if it lasts until the fall or winter of 2009 as we fear, it would be the longest recession since the 1930s. However, the downturn is not likely to be anywhere near as deep as what we saw during the Depression. The larger risk in our view is the Japan-like syndrome — a long recession followed by an extended period of weak growth. – Michael T. Darda, MKM Partners"

Here's Brad Setser:

"By bsetser

There is a real risk that the worst financial crisis since the 30s will lead to the sharpest global downturn since the 1930s. The latest ISM survey is rather grim. The New York Times reports:

“Manufacturing activity continued to decline at a rapid rate during the month of December,” said Norbert J. Ore, chairman of the Institute for Supply Management Manufacturing Business Survey Committee. This index was at the lowest reading since June 1980 when it was 30.3 percent. In addition, Mr. Ore said, “New orders have contracted for 13 consecutive months, and are at the lowest level on record going back to January 1948.”

The new orders index was 22.7 percent in December, 5.2 percentage points lower than the 27.9 percent registered in November. No industry sector surveyed reported growth in December; the jobs sector particularly grim. The employment index was 29.9 percent in December, a decrease of 4.3 percentage points from November. That was the lowest reading since November 1982.

Emphasis added. The US index for new orders is at a sixty year low. Korea’s manufacturing output is shrinking faster than in the Asian crisis. China, Japan and Europe are all looking at manufacturing contractions too.

I guess macroeconomic volatility is not a historical relic after all.

My colleague Paul Swartz and the team at the CFR’s Center for Geoeconomic Studies have pulled together a set of charts to help track the current contraction by comparing current data to the average of past recessions. I personally found the charts useful — and I would be interested in your feedback as well. Are there indicators that we should be tracking that we aren’t? And are there indicators that we are tracking that aren’t that interesting? I am pretty sure Paul will be updating the charts regularly. Adding in the results of the latest ISM survey on Monday is an obvious first step …"

Here's A Fistful Of Euros:

A Fistful Of Euros

"December’s JPMorgan Global PMI Shows Just How Far The Infection Has Spread

by Edward Hugh

OK, so now here’s the chart you really need to see (below). 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.

Now let’s stick it alongside the one Paul Krugman put up last week of the US Great Depression:

Now, 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 their monthly report suggest 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% annualised 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% saar 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 Eurozone nations, China and the UK. The sharpest falls in employment were signalled for Denmark, Spain, the US, Russia and the UK.”

And watch out for the deflation backslap:

“The Global Manufacturing Input Prices Index posted 31.3, its lowest ever reading. 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 Eurozone, Russia, Switzerland, the Czech Republic and Denmark.”

And for those of you who are still sceptical 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 (click over image if you can’t view too well). Not perfect, but not a bad guide I would say, if you like your football live, that is.

So never mind the depth, what about the duration? Well that is where I think that all of this 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, ie that we will keep getting massive year on year contractions (in some cases maybe, Latvia perhaps?????), 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, and who knows, maybe a couple of years.

Well that’s it for the big picture stuff, but I have actually been pretty hard at it all day down at the individual country level, so there is plenty more detail to come. In the next post."

I believe that the only explanation of this is the Fear and Aversion to Risk. I believe that many of the actions we are observing are a proactive response to and expected deterioration in economic conditions. In a way, it is a Proactivity Run. A wild shedding of jobs, orders, and output. It is hitting the Manufacturing Sector because it was already declining in the US. However, many other countries are assuming a massive fall off in US and European Demand, and hence Exports.

I have to say that my view is looking bad, but I'll stick to it. If we can see the following occur, among other things:

1) Government Guarantees Explicitly Stated or Believed.

2) A decent amount of Stimulus Spending on Infrastructure.

3) Robust Social Safety Net Spending.

4) Tax cuts that attack the Fear and Aversion to Risk.

5) Inflation.

6) Housing Prices Stabilize.

7) The Stock Market stabilize.

8) The End of the Bush Administration.

9) Some Stimulus Spending in the Saver Countries.

10) A Moderate increase in the US Savings Rate.

I believe that we have a chance to deal a serious blow to the Fear and Aversion to Risk in the first half of 2009.