Over the many years I've used this chart I am continually impressed at how reliable the ISM manufacturing index is as a gauge of the economy's overall strength or weakness. It's plunge from the end of August last year through December came pretty close to predicting the 6% (annualized) rate of decline in GDP for the fourth quarter. Now, in the past two months it has rebounded a bit, suggesting that Q4/08 may (as other indicators also suggest) have been the worst quarter for growth. Although the economy is still likely shrinking, it is probably shrinking at a slower pace, so with any luck we've passed an important inflection point.
If GDP declines at a 4% rate in the current quarter, as the ISM index is now suggesting, that would mean that for the six months ended March '09 the economy will have shrunk about 5% in absolute terms instead of growing about 1.5% as it would have in normal times. Compare that to the total decline in equity prices that now equals or exceeds 50%, and you get a sense for how the financial crisis is much bigger than the actual economic crisis. Wiping out paper wealth is not the same as wiping out an equal-sized chunk of GDP. The most important thing to remember is that all of the assets (people, machinery, computers, software, roads, energy generation, etc.) that were powering the economy along a 2-3% growth path a year ago are still here today. What's missing is a big stack of paper documents that say how certain cash flows in the future were to have been redistributed. Fewer people are working, but they are still available to go back to work once risk-takers regain the confidence to invest in new companies are expand existing ones.