ALERT - October 3, 2008

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

A L E R T

October 3, 2008

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Fed Began Sidestepping No "Bailout" Before First House Vote

M1 and M2 Annualized Surges of 800% and 200% 
Are Panic Distortions (Offset in M3)

Jobs Plunged by 219,000 Net of Concurrent-Seasonal-Factor Bias

"Core" Inflation Turned Higher

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TAF Expansion Accomplishes Much 
Of the Proposed Bailout’s Immediate Relief

Regardless of the near-term fate of the expanding and increasingly politicized "bailout" package, Messrs. Bernanke and Paulson will continue doing everything they have to do in order to prevent systemic collapse. The initial, expressed purpose of the bailout was to allow the U.S. Treasury to buy troubled assets from impaired banks, enabling the banks to lend money — and thus to create money supply — in a more-normal fashion. Using its crisis-created Term Auction Facility (TAF), The Fed had been generating roughly the same result by lending liquid assets (U.S. Treasuries) to the troubled banks, accepting, in return, collateral that otherwise was illiquid. 

Broad money growth surged in response to the initial $75 billion TAF, and again as the TAF was expanded to $150 billion, but money growth slowed recently as the Fed kept rolling the loans and did not add fresh liquefaction to the system. That changed on Monday (September 29th), as the $700 billion "bailout" package was heading for defeat. At that time, the Fed doubled the TAF facility, once again, to $300 billion, and added an extended $150 billion to covered liquidity over the year-end period. These actions were in addition to an expansion of currency swaps by $330 billion (to $620 billion total) with foreign central banks, which needed the swapped dollars to maintain dollar-liquidity in their systems. 

The Fed can keep creating whatever electronic liquidity it needs to — irrespective of Congress — until such time as it has to beef up its balance sheet enough to force the Treasury into seeking an increase in the federal debt ceiling. 

If Only the Fed Still Reported M3. Money supply M2 has been the broadest money measure published by the Federal Reserve, since M3 reporting was abandoned in March 2006. At that time M3 was deemed too costly to produce and otherwise was useless, per the Fed. In last night’s (October 2nd) H.6 Money Stock Measures, seasonally-adjusted M2 — the currently official broad money measure — reportedly exploded in the week-ended September 22nd by $165.5 billion to $7,900.0 billion, an annualized growth rate of 200%. M1 rose at an annualized 800%, up $60.9 billion to $1,272.2 billion. Rather than signaling the onset of hyperinflation, though, these numbers make the case for ongoing reporting of M3 and show the benefit of being able to look at the broadest money measure.

The period involved reflects the renewed investor panic in the ongoing systemic solvency crisis, but it does not yet reflect the impact of the heavy systemic liquefaction that the Federal Reserve and U.S. Treasury implemented to counter the unfolding run on the system. The broader M3 measure helps to explain what was happening, where the seasonally-adjusted non-M2 institutional money funds account plunged by $156.4 billion, to $2,098.2 billion, in the same period, with the funds apparently flowing into checking accounts (M1 [in M2]) and savings accounts (M2). Not considered yet, however, is what happened in the other non-M2 components of M3 (such as large time deposits), which will be indicated in Federal Reserve reporting at the close of business today.

Broad U.6 Unemployment Jumped to 11.0% (15.0% SGS). Against a background of a rapidly deepening recession and intensifying weakness in the key employment/unemployment indicators, the Bureau of Labor Statistics reported this morning (October 3rd) that seasonally-adjusted payrolls plunged and that the unemployment rate increased (see below), but the reported deterioration remained well shy of reality.  Monthly, quarterly and annual payroll contractions continued and deepened, showing patterns never seen outside of recessions.

Payroll Survey. The BLS reported a statistically-significant, seasonally-adjusted jobs loss of 159,000 (down 155,000 net of revisions) +/- 129,000 for September, following a revised 73,000 (previously 84,000) jobs loss in August. Annual contraction (unadjusted) in total nonfarm payrolls continued to deepen, down 0.43% in September, versus a revised 0.21% (previously 0.29%) in August. The seasonally-adjusted series also contracted year-to-year, down by 0.38% in September, versus a 0.20% (previously 0.21%) contraction in August.

Concurrent Seasonal Factor Bias. The pattern of impossible biases (see the Reporting/Market Focus in the June 10, 2008 SGS Newsletter) being built into the headline payroll employment changes intensified with September reporting. Instead of the headline jobs loss of 159,000, consistent application of seasonal-adjustment factors — net of what we are calling the concurrent seasonal adjustment bias — would have shown a more-severe monthly jobs loss of about 219,000. This upside reporting bias has been seen in 11 of the last 12 months, with a rolling 12-month total upside headline-number bias of 648,000.

Birth-Death/Bias Factor Adjustment. A minor element in September that added upside pressure to the payroll number was the monthly bias factor (birth-death model). Never designed to handle the downside pressures from a recession, the model added a 42,000 upside jobs bias to September 2008 (versus the prior September’s 29,000 upside bias), and following a net upside bias of 125,000 jobs in August 2008. The process boosted financial-activities and construction jobs by 8,000 and 12,000, respectively. 

Household Survey.  The usually statistically-sounder household survey, which counts the number of people with jobs, as opposed to the payroll survey that counts the number of jobs (including multiple job holders), showed household employment fell by 222,000 in September, following a 342,000 loss in August.

The August 2008 seasonally-adjusted U.3 unemployment rate showed a statistically-insignificant increase to 6.12% +/- 0.23% from 6.05% in August.  Unadjusted, U.3 eased to 6.0% in September, versus 6.1% in August.  The broader September U.6 unemployment rate, however, jumped to an adjusted 11.0% (10.6% unadjusted) from 10.7% (10.7% unadjusted) in August.  Refigured for the bulk of the "discouraged workers" defined away during the Clinton Administration, actual unemployment, as estimated by the SGS-Alternate Unemployment Measure, rose to 15.0% in September, up from 14.7% in August.

Background Employment Statistics. Signaling rapidly deteriorating employment conditions have been related reporting in help-wanted advertising, the purchasing managers survey and new claims for unemployment. Seasonally-adjusted August help-wanted advertising (Conference Board) plunged to 15, down from a revised 16 in (was 17) in July, and 18 in June, a fall of 16.7% in two months, down 34.8% year-to-year (versus a 36.0% annual decline in July), and at a new historic low for the series first estimated during Harry Truman’s Administration. Allowing for the impact of Internet advertising (which continued down year-to-year in August, per the Conference Board), these numbers show plummeting employment activity.

The September purchasing managers survey of manufacturing showed its seasonally-adjusted employment measure plunging to 41.8 from 49.7 in August, the sharpest monthly decline in the series in 20 years. Purchasing managers results are diffusion indices, where the percent of positive responses are added to half the unchanged responses. Hence a reading of below 50.0 indicates a series in contraction and vice versa. (The nonmanufacturing survey is not available as this goes into the production process.)

The new claims for unemployment insurance series also is getting much worse, very quickly. On the basis of a 17-week moving average, new claims were up year-to-year (an increase here is an economic negative) by 34.4% for as of the week ended September 27th.   Such is likely to keep rising, with the same week on a four-week moving average basis showing a year-to-year increase of 48.8%.

Purchasing Managers Index Show Sharp Deterioration in Economic Activity. Beyond collapsing employment, the overall September manufacturing survey fell to 43.5 from 49.9 in August, the weakest showing since the last recession. New orders fell to 38.8 from 48.3, a level only seen historically at the deepest part of recessions. Production fell to 40.8 from 52.1, and prices tumbled sharply to 53.5 from 77.0, helping to lock in a sharp third-quarter industrial production contraction on both a quarterly and annual basis. The decline in the price index, though still in inflation territory above 50.0, was unusually severe, even allowing for the recent sharp decline in oil prices.

"Core" Inflation Pick-Up.  In other inflation reporting, the August 2008 personal income report showed unusual upside movement in the "core" PCE deflator, the inflation rate used to deflate the personal consumption component of GDP, net of any food and energy inflation. Where the year-to-year "core" rate has held around 2.2% for an extended period of time, June notched higher to 2.3%, then to 2.5% in July and to 2.6% in August. While still well shy of reality, the numbers suggest that the broad impact of energy inflation finally is beginning to make its way into official reporting. Anecdotal evidence suggests that many firms that have held back price increases now are feeling such a profit squeeze that they have no choice but to pass along higher costs.

General Outlook Unchanged. [What follows is repeated from the September 29th SGS Newsletter and recent Alerts.] It is not likely that the systemic solvency crisis is behind us, and it is too late to prevent a recession. The inflationary recession was well underway before the housing/mortgage crisis, and little can be done to stimulate economic activity, to contain inflation or to provide a long-term prop to equity values. The government, however, does have the ability to support depositor safety, to prevent a collapse of the related financial services industry and to prevent a deflation in the prices of goods and services. Indeed, the cost of systemic salvation is higher price inflation.  

The various markets are about as volatile and dangerous as they can get. With extraordinary crosscurrents from the solvency crisis and various governmental and global central bank interventions in the markets and marketplace, volatility likely will continue, sometimes in directions that may seem irrational. The gold and currency markets, in particular, remain subject to jawboning and both covert and overt central bank intervention, aimed at discouraging investors from seeking safety in gold or outside the greenback. 

All factors considered, the broad outlook remains the same: further intensification of the inflationary recession and a continued deepening systemic and banking solvency crisis.  Growing market recognition of these issues and mounting global political tensions have intensified the risks for continued unstable market conditions, markedly.

Over the near-term, negative major market displacements should follow or be accompanied by intense, broad selling of the U.S. dollar, which may be beginning anew.  An eventual, increasing flight-to-safety outside of the U.S. dollar also should include flight-to-safety into gold.  Despite continuing softness in oil prices, current levels (anything above $90 per barrel) remain highly inflationary. Over the longer term, U.S. equities, bonds and the greenback should suffer terribly, while gold and silver prices should boom.

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