Halftime Report - Industrial Production - Analyst Blog

Two years ago, President Obama took the oath of office. This seems like a good time to assess his presidency in terms of the economy and see how he stacks up relative to other recent presidents.

Clearly Obama took charge during a difficult time for the economy -- probably more challenging than any other recent president, with the possible exception of Ronald Reagan. However, the economic challenges facing Obama were certainly much different than those facing Reagan.

Clearly, in some senses it is impossible to be totally fair to any president in looking at his performance relative to other presidents, since they all were in office under different circumstances. No one can swim in the same river twice, even if you do visit your favorite swimming hole along its shores on a regular basis.

Still, to asses any performance, one has to compare it to something, and other recent presidents seems like a reasonable exercise.

In the first of these posts, I looked at employment. (see "The Employment Score at Halftime") In this one I am going to look at Industrial Production (IP) and Capacity Utilization (CU).

The total figures for both IP and CU includes the output and utilization not only of the nation's factories, but its mines and utilities as well. The utility numbers can distort things, even though the data is seasonally adjusted. Changes in electrical output can be as much a function of the weather as in economic activity. Thus I also looked at the data for just manufacturing production and utilization.

As with the first of these posts, I have used two different starting points to assess each president's performance. The first is the February numbers just after the inauguration. I wanted to keep things consistent between the posts. The president does not take office until January is 2/3 over, so I think that February is a fairer starting point than January.

The U.S. economy is a very large ship, and it does not turn around on a dime. During the first few months the President is still getting his team through the Senate confirmation process. I thus present a second set of data that uses May of the inauguration year as the starting point. The end point is the December data immediately following the mid-term elections. I have only looked at the first terms of the two-term presidents.  

Unlike with employment, where Obama was squarely in the middle of the pack, here he comes in a relatively close second to Clinton, with a 7.25% increase in total industrial output, including a 8.55% increase in factory output. Reagan and both Bushes presided over declines in industrial production, both total and manufacturing. The story for capacity utilization is much the same, only in this case, Obama has seen an even bigger increase than Clinton did.



If we wait until May to start the clock, Obama takes the lead from Clinton, as the level of Industrial production was declining in the early months of the Obama presidency. Using May as a starting point also makes the second president Bush look somewhat better, with total production unchanged and factory output up slightly rather than down.

The magnitude of the decline is also less for the first President Bush, while Reagan looks even worse. Obama extends his lead over Clinton when it comes to capacity utilization, both total and factory if May is chosen as the starting point. Reagan looks slightly worse and the first President Bush looks just slightly less worse than if February is chosen as the starting point. The same is true for the second President Bush.



Percentage changes are obviously greatly influenced by the starting level. In looking at changes, one also should look at the absolute change (i.e. subtract the starting level, rather than dividing by it). The second table looks at the absolute changes in the same four measures of production. The rankings change a little bit under this way of looking at things.

From the February just after inauguration to the December following the mid-term elections, Obama has presided over the largest increase in the Industrial Production index, up 6.418 points in total, and 7.317 points for manufacturing. Clinton is right on his heels at 6.299 points for total and 7.014 points for manufacturing. Both Buses and especially Reagan presided over sharp drops in production in the first two years of their presidencies.

The story is much the same when it comes to Capacity Utilization. When Obama took office, the nation's factories, mines and power plants were running at just 70.7% of capacity, and the factories alone were running at just 67.0% of capacity. Both were record low levels at the time.

By December 2010, total capacity utilization had climbed to 74.0% while factory utilization was up to 73.5%. In absolute terms, neither number is particularly strong, but the increase is far greater than any of the other recent presidents have presided over.

Capacity utilization, on the other hand, plunged during Reagan's first two years in office, falling from 80.0% (total)/77.4% factory to 70.9%/67.9%. Both Bushes presided over large -- but not quite as disastrous -- drops in their first two years in office.



If the starting point is moved to May to allow the new president's policies a chance to get implemented, the overall rankings do not change. However, in absolute terms Obama looks even better; Clinton is relatively unchanged. Both Bushes look a little bit better, but still not great, and Reagan looks even worse.



Thus, on the basis of the change in output, one has to say that Obama is far from the worst president we have ever had, even among the presidents of the last 30 years. Granted he started from a low base, but things were deteriorating quickly as he took office (thus the numbers look better when the starting point is May rather than February). Reagan, who fares the worst in this analysis by a large margin, went on to win re-election by a landslide.

On all four of these measures, the December after the mid-terms was the lowest point of the Reagan presidency. The second term proved to be quite successful for Reagan economically. The performances of both of the Bushes were decidedly mediocre when it came to output of the economy during the first half of their presidencies.

Both Obama and Clinton had extremely strong output growth in their respective first halves. The next two years should tell if it is “Morning in America” again, or a time of mourning for America. Reagan is generally looked back on now as a pretty good president, even begrudgingly admired by many on the political Left. However if he had left office after two years, his place in economic history would be closer to that of Herbert Hoover.

We do not know what the next two years will bring. Based on the record of the first two years, Obama is looking very good, at least relative to other recent presidents, at least when it comes to output growth.

Obama took office under far more trying economic circumstances than did any of the other recent presidents, with the possible exception of Reagan. That did provide a low base for him to work off of, but he also had to turn around an economy that was in freefall.

Reagan took office at a time when the country also faced big economic challenges, but they were more related to high inflation than to a financial crisis. Bush took office at a time when things were going great for the economy, but soured soon after, and the economic problems were exacerbated by 9/11.

There are those that would argue that the president gets too much credit or blame for the state of the economy, sort of like the quarterback of the football team. Perhaps that is true, but no one can deny that the employment picture plays a great role in determining the fate of presidencies, and that government policies do affect the economy.

If that were not the case, then perhaps political campaigns would have to refrain from mentioning the economy at all. Clearly that is not going to happen. Yes there are other people on the field, but a great performance by the quarterback can save the game, and if the QB is having an off day, it is unlikely that the team will win, regardless of how well the linebackers and offensive guards play. Based on the industrial output picture at the end of his second season, it looks like Obama deserves a spot in the Pro Bowl.

Of course, employment is not the only economic variable that we should be concerned with. Time permitting, I plan several more of these posts in which I will deal with other variables such as GDP growth, industrial production, inflation and investment returns.

If there are any variables that you think would be particularly telling, please mention them in the comments section. Provided the data is available (all data for this analysis comes from the Federal Reserve of St. Louis database) I will try to incorporate your suggestions into future posts.
 
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