JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

 
 
FLASH UPDATE
 
 
January 19, 2008
 
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Gimmicked Stimulus Cannot Reverse Structural Downturn
 
Quarterly Industrial Production Contracted
 
Housing Starts Plunge
 
CPI Scuttled Annual Retail Sales
 
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PLEASE NOTE: The SGS-Alternate CPI and Inflation Calculator have been updated through December 2007, and the SGS-Ongoing M3 series has been revised through December 2007, so as to incorporate the Federal Reserve’s benchmark revisions to the still-reported M2money supply series and memorandum items. Both series have been posted to the Alternate Data Series tab on www.shadowstats.com.

– Best wishes to all, John Williams

 

With the Administration and the Fed promising economic stimulus early in an election year, one can be certain that coming economic reporting and financial market developments still hold a number of unhappy surprises. Last week’s data showed further deterioration in the structural, inflationary recession that continues to impair broad U.S. business activity. No quick-fix stimulus gimmick — tax rebate or interest rate cut — will have any lasting or meaningful impact.

In order to have sustainable GDP growth, disposable personal income has to be showing sustained growth net of inflation impact. Otherwise, consumer consumption, which accounts for over two-thirds of GDP, cannot grow on a sustained basis. Although official income reporting in the GDP-related income accounts generally shows positive real (inflation-adjusted) income growth, such is not reality. That consumer take-home pay is not keeping up with inflation can be seen in consumer confidence surveys, and in the annual contractions reported in real average weekly earnings, in summary aggregate income numbers reported by the IRS and in the Census Bureau’s annual income survey. Without basic income growth, short-lived economic growth can be had only from consumers taking on more debt or liquidating savings, but such measures already are at or near their limits and cannot be sustained.

From the standpoint of the Administration and Congress, they have no approach that can address the structural downturn, only gimmicks that might give a very short-lived boost to consumption. With the federal government financially bankrupt in all but name, there also is no funding for such a package. Further, the Fed is limited in what it can do with rate cuts. Mr. Bernanke knows, each time he eases, that he is at risk of triggering a U.S. dollar collapse. It is as if he were blowing up a balloon that held back the dollar dumping. He knows the balloon can burst at any time, and the next puff or rate cut could do it. He does not appear to have the will to resist heavy, counterproductive pressures he is receiving from Wall Street and the Administration.  

The preceding issues have been addressed in various monthly newsletters and will be reviewed anew in the months ahead. The general outlook for the year ahead remains in place: a deepening inflationary recession, a major bear stock market, heavy selling of the U.S. dollar, heavy buying of gold, and an eventual flight to safety away from the greenback that will spike long-term interest rates. 

Last week, beyond the December retail sales and PPI reporting covered in the January 15th Flash Update, the Federal Reserve published its benchmark revision to the monetary aggregates, which had the effect of reducing reported annual growth in recent months, with December 2007 M2 annual growth revising to 5.8% from 6.1%, and with the SGS-Ongoing M3 annual growth estimate revising to 15.0% from 15.2%. As is common with these revisions, however, the general growth patterns remained intact. In other reporting:

Fourth-Quarter Industrial Production Contracted. Back in the days when GDP (or GNP) growth estimates had some meaning, a 1.0% annual quarterly contraction in industrial production usually would be coincident with a quarterly contraction in GDP. Given current politics and methodological changes of the last two decades or so, reported GDP growth likely will remain in positive territory until after the mid-term election.

Seasonally-adjusted December industrial production was unchanged (plus 0.1% net of revisions), following a 0.3% gain in November and a 0.5% contraction in October. Again, the fourth-quarter showed a seasonally-adjusted annualized contraction of 1.0% versus the third quarter. Year-to-year change eased to 1.6% in December from 2.2% in November

Housing Starts Contraction Deepens. Seasonally-adjusted December housing starts fell by 14.2% (15.2% net of revisions) +/- 8.8% (95% confidence interval) on a monthly basis, after a 7.9% decline in November. Year-to-year, December starts were down by 38.2%, just shy of the low of the current recession, but still short of the 50% year-to-year decline seen at the trough of the 1990/1991 recession. November starts were down by 25.0% from the year before.

CPI Inflation Exceeds Retail Sales Growth. Though still shy of reality, the December CPI inflation rate was high enough to take the reported 4.1% annual growth in December retail sales into contraction, net of inflation. Such rarely is seen outside of recessions and is particularly ominous, where retail outlets often make or break their year with holiday sales.

The Bureau of Labor Statistics (BLS) reported the seasonally-adjusted December CPI-U up by 0.30% (minus 0.07% unadjusted) +/- 0.12% for the month, following November’s 0.80% (0.59% unadjusted) gain. December’s annual CPI inflation eased to 4.08% from November’s 4.31%.

What was fascinating in the financial media’s handling of the annual inflation number was the emphasis on the surge in December year-to-year inflation to 4.1% in 2007 from 2.5% in 2006. Inflation just as easily could have been touted in terms of annual average, where the average 2007 CPI inflation dropped to 2.8% from 3.2% in 2006. That latter case might have raised some credibility issues for the BLS, as well as highlighting unusual patterns in some of last year’s monthly reporting.

Year-to-year annual inflation likely will surge anew in January 2008, dependent on the seasonally-adjusted monthly gain exceeding the 0.17% increase seen in January 2007. The difference will directly add to or subtract from December’s annual inflation rate of 4.08%.

Annual inflation for the Chain Weighted CPI-U (C-CPI-U) — the substitution-based series that increasingly gets touted by the manipulators and inflation apologists as the replacement for the CPI-U — was 3.41% in December, down from 3.57% in November, but up from 2.36% in December 2006.

Adjusted to pre-Clinton (1990) methodology, annual CPI growth was about 7.4% in December, down from 7.6% in November, but up from up from 5.8% in December 2006. The SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, was roughly 11.7% in December, unchanged from November, and up from 10.0% in December 2006.

Week Ahead. There are no significant economic reports due for release in the next week. Generally, despite the inflationary recession rapidly gaining recognition, most upcoming reports should continue to surprise economic expectations on the downside and inflation expectations on the upside.

Further details will follow in the January SGS newsletter.

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Posting of the January SGS is targeted for the week of January 28th. An e-mail advice will be made of its and any intervening Flash Update/Alert postings.