COLUMN - U.S. recession now worst since 1945 - official: John Kemp

-- John Kemp is a Reuters columnist. The views expressed are his own --

By John Kemp

LONDON (Reuters) - Following another 1 percent contraction in U.S. manufacturing last month, the current recession is now officially the worst since 1945 (when output collapsed amid the post-war demobilisation). It has edged out the previous-worst recession in 1973 to claim first place in the post-war hall of infamy.

The attached chartbook shows how manufacturing output has behaved during each of the 19 recessions since 1920 (here). Each recession is dated from the year in which output started to fall (so the current recession is labelled 2007).

As the charts show, the current contraction is deeper than any recession since 1945, and already longer than most of them, with output still declining briskly.

In suddenness and depth it resembles the violent cyclical downturns that characterised the U.S. economy in the 19th and early 20th centuries -- before the advent of Keynesian demand management and the onset of the Great Stabilisation after 1945.

But comparisons with Milton Friedman's Great Contraction of 1929-1933 remain wide of the mark. After 16 months of recession, manufacturing activity is around 16 percent lower than at the cyclical peak in December 2007. At the same point during the Great Contraction, output was down 31 percent, almost twice as much.

What seared the Great Contraction into popular memory was not just its depth (in terms of output lost) but unusual length. Output fell month after month with little respite for four long years. While the current recession is already fairly long and shows disappointingly few signs of reaching the trough yet, at least in the official statistics, no one expects it will continue for another two and a half years.

The loss of output last month was greater than most forecasters anticipated. But business survey data on production levels and orders continue to suggest the downswing is flattening out and the economy is fast approaching the trough. It still seems reasonable to expect that the economy will hit rock bottom sometime in the third quarter (July-September).

Despite strong support from fiscal and monetary policy, however, the recovery is likely to be halting, as caution, rising unemployment, and the need to work down excessive debt levels inhibit consumer and business spending.

Based on past trajectories, output is unlikely to regain its previous cyclical peak for another 24-30 months, well into 2011.