Flash Update
FLASH UPDATE - November 30, 2008
JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS
FLASH UPDATE
November 30, 2008
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Employment Outlook Sinks
3rd-Qtr Gross Domestic Income Contracted Year-to-Year
Broad Money Growth Stagnant in Latest Week
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PLEASE NOTE: Any major systemic, market or economic surprises will be addressed in the days ahead with a Flash Update or Alert. Otherwise, the next planned update is for Friday, December 5th, following the release of the November employment/unemployment report.
– Best wishes to all, John Williams
Inflationary Recession Continues to Intensify. Gross Domestic Income (GDI) is in recession. The GDI is the equivalent to the GDP (income-side versus consumption-side), in theory. The two series, however, rarely are equal. At best, this is due to the inability of the Bureau of Economic Analysis (BEA) to measure economic activity adequately. At worst, the BEA is not able to offset fully the upside biases massaged into the popularly-reported GDP number.
The just-reported real (inflation-adjusted) growth in GDI showed not only an annualized quarterly contraction of 0.56% — the third quarterly contraction in the last four quarters — but also an annual contraction of 0.43%, following a 0.30% annual gain in the second quarter. Quarterly contractions in three out of four quarters, and/or an annual contraction, never have been seen outside of a formal recession.
There was nothing otherwise in the reporting of the last week — or likely in the week ahead — that would suggest anything other than a continuing and deteriorating inflationary recession for at least the next six-to-nine months. Any massive fiscal stimulus as promised by the incoming Obama Administration — even enacted at the time of the Inauguration — would not have noticeable impact on activity until the second half of 2009. It takes six-to-nine months to move broad economic activity.
Even then, the impact from fiscal stimulus would be fleeting, as the underlying structural employment and income problems — discussed in the prior newsletter — would remain. If the structural problems were addressed, the positive impact there would be seen in years, not months. As to massive fiscal stimulus, such would tend to spike money growth and inflation prospects that likely already will be viewed as a serious problem by the global markets of the time.
GDP Revision Was Minimal, Well Shy of Reality. The BEA estimated a revised contraction of 0.51% (previously 0.25%) +/- 3% (95% confidence interval) for the "preliminary" estimate revision of annualized real growth in third-quarter GDP. The revision was little more than statistical noise. Annualized real growth in the second quarter had been estimated at 2.83%.
Year-to-year change slowed sharply, with annual third-quarter GDP growth slowing to 0.74% (previously 0.81%), from 2.05% in the second quarter. The SGS-Alternate GDP estimate is for an annual contraction of roughly 3.3% versus an annual (not annualized) contraction of 2.9% in the second quarter. Against reporting of underlying economic series, an annualized quarterly contraction in excess of 2% would have been more realistic than the 0.51% estimate.
Against the heavy upside biases built into GDP reporting, the BEA had to allow an inflation surge in order to show the GDP in real contraction. The GDP implicit price deflator (GDP inflation rate) revised to 4.11% from 4.09%, still an at 18-year high, versus the multiple-year low of 1.26% used to keep second-quarter GDP growth in positive territory (the lower the GDP inflation rate used, the higher the reported real growth).
The BEA’s GDP-like measures were estimate for third-quarter 2008 in the latest reporting: Gross National Product (GNP), where GDP is GNP net of trade in factor income (interest and dividend payments); and Gross Domestic Income (GDI), which is the theoretical income-side equivalent to the GDP’s consumption-side measure (see above).
GNP. Third-quarter GNP contracted at an annualized rate of 0.43%, versus a 2.10% gain in the second quarter. Year-to-year change was 0.77% in the third-quarter, versus 2.43%, in the second.
GDI. Third-quarter GNP contracted at an annualized rate of 0.56%, versus a 0.46% gain in the second quarter. Nonetheless, that represented the third quarterly contraction in the last four quarters. As a result, year-to-year change turned negative by 0.43% in the third quarter, following a 0.3% annual gain in the second. Such patterns never are seen outside of a formal recession.
Durable Goods Orders Indicated Severe Economic Contraction. The regularly-volatile new orders for durable goods plunged on both a month-to-month and year-to-year basis in October. October’s seasonally-adjusted monthly decline of 6.2% (7.1% net of revisions) followed a revised 0.2% decline in September, previously reported as a 0.8% monthly increase. Year-to-year change continued to decline in a pattern suggestive of severe recession. Before any accounting for inflation, October’s new orders were down 10.6% from October 2007, against September’s 4.6% annual decline. Following an annualized third-quarter contraction of 16.2%, new orders in the fourth quarter were falling at an initial annualized pace of roughly 23%.
The closely followed new orders for nondefense capital goods were down by 3.6% for the month, versus a 1.0% contraction in September, and fell 11.3% year-to-year, following a 7.8% annual drop in September.
Consumer Confidence Continued to Show Deep Recession. After extreme declines in October, the November consumer confidence measures flattened out some, though mixed, perhaps influenced somewhat by plunging gasoline prices and/or election results. The Conference Board’s Consumer Confidence measure rebounded by 15.7% month-to-month in November, after dropping by 36.8% in October. Year-to-year change for the three-month moving average eased to a decline of 48.6% in November, versus a 47.1% decline in October.
The Reuters/University of Michigan’s Consumer Sentiment measure dropped by 4.0% in November, following an 18.1% decline in October. Year-to-year change in the Sentiment three-month moving average eased to a decline of 23.8%, versus a 22.9% drop in October.
These lagging, not leading indicators confirm that the economy has been in a deepening recession.
Annual Broad Money Growth May Slow Further. As noted in the previous Flash Update, for the two weeks ended November 19th (reporting of the next two-week period is due on December 4th), the seasonally-adjusted St. Louis Fed’s adjusted monetary base showed explosive growth, reflecting increased total bank reserves. Against the prior two-week period, the St. Louis Fed measure gained 19.1%. Year-to-year growth rose to 75.5% from 48.2% in the period before. Where the Fed’s primary tool for controlling money supply is the monetary base, the recent surge in annual growth has not yet passed through to broad money measure. Such awaits the banking system moving towards more-normal growth in commercial and consumer lending.
If the weekly data related to M3 continue their recent patterns, the SGS-Ongoing M3 estimate for the November monthly average would show continued slowing year-to-year growth, down to roughly 9% in November, versus 10.8% in October, with the month-to-month change flat-to minus.
In terms of reported seasonally-adjusted M3 components, the Federal Reserve’s latest H.6 weekly data (week ended November 17th) showed M2 rose by $22.5 billion to $7,929.4 billion (up by $29.1 billion the prior week), and institutional money funds rose by $14.3 billion to 2,337.3 billion (up by $10.0 billion the prior week). Although the H.8 data (week-ended November 19th) suggested some rebound in bank repos (down sharply the week before), the decline in large time deposits continued, down about $32 billion in the latest week, versus roughly a $37 billion weekly decline the week before. In aggregate, seasonally-adjusted M3 likely was little changed in the most recent week.
The SGS-Ongoing M3 monthly measure includes modeled estimates of monthly-average large time deposits, repos and euro deposits, based on Fed reporting, proprietary econometric modeling and quarterly benchmarking with flow-of-funds data published by the Fed.
Deteriorating November Employment/Unemployment Outlook. With the November employment report due for release by the Bureau of Labor Statistics (BLS) on Friday (December 5th), market expectations (per Briefing.com) are for payrolls to drop by 300,000 month-to-month and for the unemployment rate to rise 0.3 percentage points to 6.8%. While such expectations are not unreasonable, reality likely is somewhat worse, as suggested by other employment indicators shown below. From the standpoint of salving the financial markets, however, massaged reporting — showing somewhat better than consensus results — is a fair bet.
Sharp deterioration has continued in key series that tend to lead the monthly jobs and unemployment reports. October help-wanted advertising fell to a new historic low of 14, from 15 in September. Such was down 36.4% year-to-year, versus a 37.5% annual decline in September. Allowing for the exacerbating impact of Internet advertising, the current index level still is suggestive of extreme deterioration in employment conditions.
The year-to-year change in the 17-week moving average of new claims for unemployment insurance has continued to surge (an economic negative), up by 45.7% in the week ended November 22nd, versus an annual growth rate of 39.4% a month earlier, as of the week ended October 25th.
The employment components of both the October manufacturing and non-manufacturing purchasing managers surveys, which tend to lead payroll employment by a month, plunged deep into recession territory in the last reporting.
The purchasing managers manufacturing survey for November (due Monday, December 1st) likely will show continued decline, particularly in the highly significant new orders category, and again in the employment area. The services survey, due Wednesday, December 3rd, likely also will show continued deterioration in its employment component.
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