JWSGS - FLASH UPDATE - Aug. 7, 2006

JOHN WILLIAMS' SHADOW GOVERNMENT STATISTICS

Flash Update

August 7, 2006

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Employment Growth Remains Indistinguishable from Contraction

Federal Deficit Reality Surfaces in Popular Media

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The employment data are beginning to act recession-like, and that normally would put the Fed into an easing mode. Yet, as evidence grows of slowing/falling economic activity, evidence of accelerating inflation is mounting, too. There is little the central bank can do to contain inflation or to stimulate the economy. Accordingly, Fed considerations and activity will be dominated by efforts to maintain stability in the financial markets and the U.S. dollar. If market expectations strongly are for the Fed to hold rates unchanged, that is what the Fed will do. Any "pause," however, will be just that. Efforts to support the dollar with higher interest rates will be needed, soon.

With July's seasonally-adjusted monthly payrolls reported up by a below-consensus 113,000 (124,000 net of revisions), official monthly employment growth has been on the cusp of statistical significance (+/- 106,000 jobs) for four straight months. June's initially-reported gain of 121,000 revised to 124,000, which followed May and April gains of 100,000 and 112,000, respectively. Unadjusted, July's annual employment growth eased to 1.30%, down from 1.39% in June and the near-term peak of 1.57% in March.

The household survey showed some catch-up in reporting, with seasonally-adjusted July employment (the number of people working versus the number of jobs as reported in the payroll survey) falling by 34,000, after a 387,000 gain the month before. The seasonally-adjusted July unemployment rate (U-3) rose to 4.75% from June's 4.60%, an increase within the +/- 0.2% margin of error. Unadjusted U-3 was 5.0% in July, up from 4.8% in June. U-6, the broadest unemployment measure published, rose to 8.5% in July from 8.4% in June, adjusted, and from 8.7% to 8.8% unadjusted. Net of the elimination of the counting of 90% of discouraged workers implemented during the Clinton Administration, actual unemployment remains around 12%.

Politics still is understating the economic weakness that is surfacing in the employment and household surveys. The current numbers were against a continued background of weakening private employment statistics. Seasonal-adjustment and bias-factor games are contributing to that circumstance.

Further details will follow in the regular August SGS.


$3.5 Trillion Federal Deficit Becomes USA TODAY Cover Story


Many thanks to subscribers who e-mailed comments and links to two recent articles on federal deficit reality. The dire nature of the problem appears to be going public. The actual federal deficit has been running around $3.5 trillion per year (instead of the official number that is about one-tenth of that), based on generally accepted accounting principles -- GAAP accounting -- as used in the corporate world. The largest accounting issue is unfunded liabilities for Social Security and Medicare.

First was Laurence J. Kotlikoff's "Is the United State Bankrupt?" (pdf) published in the Federal Reserve Bank of St. Louis Review for July/August 2006 . Second was Dennis Cauchon's "What's the real federal deficit?" in the August 3rd USA TODAY.

Mr. Kotlikoff argues that "the United States is going broke," but that it can stave off bankruptcy through "radical reform of U.S. financial institutions." I argue that the there is no practical political or fiscal approach to staving off bankruptcy. While there likely will be no formal default on U.S. Treasuries, the printing presses will be revved up to print as much money as needed, and the situation will be resolved in an ultimate hyperinflation.

The USA TODAY article shows GAAP accounting results before 2001, but the earlier "prototype" data are not directly comparable to the 2001 and later reporting, due to accounting and actuarial changes. Otherwise, the data shown are as we have published previously.

Mr. Cauchon notes that "The Bush administration opposes including Social Security and Medicare in the audited deficit. Its reason: Congress can cancel or cut the retirement programs at any time, so they should not be considered a government liability for accounting purposes."

I would not bet a great deal of money on Congress canceling or cutting Social Security and Medicare.

Both articles are daring and worthy ventures putting previously unthinkable concepts before the public. Of course, John Crudele of the New York Post was the groundbreaking reporter, having written articles exposing these issues for a number of years.

My full comments on this problem were covered in the December 19, 2005 SGS Supplement on the government's financial reporting, and the earlier July 7, 2005 update on Federal Deficit Reality, available in the archives.

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August's "Shadow Government Statistics" is scheduled for release on Wednesday, August 16, 2006. The posting of the next SGS, as well as any Interim Updates or Alerts, will be advised immediately by e-mail.