Industrial output in the G7 major economies fell a further 0.9% in October, bringing the cumulative decline from the peak in February 2008 to 5.3%.

The first chart below compares the current recession with the three largest prior output declines since World War 2 – 1974-75, 1980-82 and 2000-01. The current contraction is already greater than the fall in 1980 and may soon surpass the 2000-01 decline. Activity is, however, weakening less rapidly than in 1974-75, when output slumped 12% from peak to trough.

The chart shows that the initial slide in output was over after 12 months in all three prior recessions. This suggests the current decline may bottom out in early 2009.

This suggestion is supported by the recent behaviour of G7 narrow money M1 – currency and checkable deposits. The annual rate of change of inflation-adjusted M1 bottomed in August at -1.5%, recovering to 2.4% in October. A trough in this measure preceded the low in industrial output by seven months in 1974-75, three months in 1980 and 11 months in 2000-01. The average lead of seven months implies a March output bottom.

An approaching trough in activity should be signalled in advance by business surveys, which lead output by about three months. Purchasing managers’ new orders indices fell further in November, in some countries to record low levels. However, revisions to company earnings estimates by equity analysts correlate with business surveys and have become less negative in recent weeks – see second chart.