FLASH UPDATE - August 7, 2009







August 7, 2009




Depression-Warped Seasonal Factors Improved Reporting of July
Employment and Unemployment, Purchasing Managers Manufacturing

Watch Out for Sharply Negative Economic Surprises Next Month

Broad Money Growth Continues Signaling Ongoing Crises




PLEASE NOTE: The first estimate of the SGS-Ongoing M3 Measure for July will be published on the "Alternate Data" tab at www.shadowstats.com, over this weekend. The next Flash Update is planned for Thursday (August 13th), following release of the July retail sales report, with a subsequent Flash Update on Friday (August 14th), following the CPI and industrial production releases. Any interim updates or alerts would be published as dictated by developing economic or financial-market circumstances.

– Best wishes to all, John Williams


Auto Industry Turmoil Distorted Key Reporting. The economy remains in a deepening downturn, irrespective of the better-than-expected news out of today’s (August 7th) employment and unemployment reporting from the Bureau of Labor Statistics (BLS). As suggested as a possibility in the SGS Newsletter No. 51 and in the July 31st Flash Update, heavily distorted seasonal adjustments that artificially reduced the levels of new claims for unemployment insurance appear to have flowed through not only to July unemployment and payroll reporting, but also to the July purchasing managers manufacturing survey. 

July usually sees a regular pattern of planned automobile production line shutdowns to accommodate retooling for the new model year, but recent disruptions to the auto industry have changed pattern this year. Without the usual pattern of shutdowns, the government’s computers nonetheless responded by creating the usual offsetting boost in jobs, not only in the auto industry, but in supporting industries as well. The auto industry itself was alone among durable goods manufacturing industries in showing a reported, seasonally-adjusted monthly gain in July, up by 28,000 jobs.

The seasonal-factor distortions also appear to have played through to the Institute for Supply Management’s (ISM) purchasing managers surveys, where a reading below 50.0 in the diffusion indices indicates contracting activity. The seasonally-adjusted employment index for manufacturing rose from 40.7 in June to 45.6 in July, still in contraction but a better reading. In contrast, the nonmanufacturing employment index, which would have reflected minimal impact from the auto industry distortions, fell from 43.4 in June to 41.5 in July. There is the possibility that these distortions also may impact the reporting of July industrial production (see below).

As further noted in SGS Newsletter No. 51, the severity of the ongoing economic contraction has started to generate other distortions in data reporting: (1) Year-to-year comparisons will begin to see a flattening in annual declines, as year-ago numbers used in comparisons were in severe contraction. (2) Extreme economic disruptions have distorted patterns of regular activity and related seasonal-adjustment processes. (3) The birth-death model overstates payroll levels during recessions. (4) Short-term discouraged workers begin to disappear from the broader BLS unemployment measures as their "discouragement" extends beyond one year (those discouraged for more than a year — since July 2008 or before — have disappeared from the rolls of the government’s "alternative measures of labor underutilization," but are estimated in the SGS-Alternate Unemployment measure).

While Wall Street likely will hype the July employment results as confirmation that economy has turned the corner, such hype and resulting overly optimistic expectations should be slammed in the months ahead, when the positive reporting distortions reverse out in a normal catch-up process.

July Payroll Reporting Showed Upside Revisions to Prior Data; Concurrent Seasonal Factor Bias Reversed in July. Reversing recent trends, the July payroll reporting showed upside prior-period revisions, but, as discussed above, it also was subject to major reporting distortions tied to seasonal factors and a deepening downturn.

- Payroll Survey. The BLS reported a statistically-significant, seasonally-adjusted jobs loss of 247,000 (down 204,000 net of revisions) +/- 129,000 (95% confidence interval) for July 2009, following a revised 443,000 (previously 467,000) jobs loss in June.

From peak-to-trough (the peak month was December 2007; the current month of July also is the short-lived trough of the current cycle), payroll employment has declined by a seasonally-adjusted 6,664,000 jobs, or by 4.8%. Year-to-year contraction (unadjusted) in total nonfarm payrolls flattened out in July, down 4.18% in June versus a revised 4.19% (was 4.22%) in June.

The unadjusted annual declines in the June and July payrolls remain the deepest since a similar decline at the trough of the 1958 recession, but still shy of the 4.9% trough seen in the 1949 downturn. When the 1949 annual low growth is broken, most likely next month, the annual percentage contraction in payrolls will be the most severe since the production shutdown following World War II.    

Underlying economic series, shy of the related seasonal distortions in new claims for unemployment and the ISM manufacturing index, are consistent with a monthly July jobs loss in excess of 600,000, and a further increase in the unemployment rate.

- Concurrent Seasonal Factor Bias.  The pattern of impossible biases being built into the headline monthly payroll employment reversed, with a downside bias of 134,000 jobs in July 2009 reporting. Instead of the headline jobs loss of 247,000, consistent application of seasonal-adjustment factors — net of what I call the concurrent seasonal factor bias (CSFB) — would have shown a less-severe monthly jobs loss of about 113,000. This factor has generated an upside reporting bias seen in 10 of the last 12 months, with a rolling 12-month total upside headline-number bias of 1,106,000. A worksheet on this is available upon request. Due to technical issues, the CSFBd graph usually published with this report will not be shown today. (See SGS Newsletter No. 50, for further background.)

- Birth-Death/Bias Factor Adjustment.  As discussed in SGS Newsletter No. 51, Birth-Death Model biases tend to overstate payroll employment during recessions. Never designed to handle the downside pressures from an economic contraction, the model adds a fairly consistent upside bias to the payroll levels each year, currently averaging about 76,000 jobs per month. The unadjusted July 2009 bias was 32,000, up from 25,000 the year before, but down from 185,000 in June.

- 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 July employment fell by 155,000, after falling by a reported 374,000 in June. At work here continue to be poor quality seasonal adjustments.

The July 2009 seasonally-adjusted U.3 unemployment rate showed a statistically-insignificant decrease, to 9.36% +/- 0.23% (95% confidence interval), from 9.51% in June.  Unadjusted U.3 held at 9.7% in July.  The broader June U.6 unemployment rate eased to an adjusted 16.3% (16.8% unadjusted), from 16.5% (16.8% unadjusted) in June.

During the Clinton Administration, "discouraged workers" — those who had given up looking for a job because there were no jobs to be had — were redefined so as to be counted only if they had been "discouraged" for less than a year. This time qualification defined away the long-term discouraged workers. Adding them back into the total unemployed, unemployment in line with common experience — as estimated by the SGS-Alternate Unemployment Measure — held at about 20.6% in July. See the Alternate Data tab at www.shadowstats.com for a graph and more detail.

July M3 Annual Growth Likely Below 5.5%.  Despite some weekly pick-up in M3 components (seasonally adjusted) M2, institutional money funds and last week’s partial estimate on large time deposits, the seasonally-adjusted SGS-Ongoing M3 estimate for July still appears headed for a month-to-month decline, with annual growth slowing to below 5.5%, versus the 6.4% annual growth estimated for June. Annual growth rates in monthly M1 and M2 appear to have slowed slightly in July, to 17.1% and 8.3%, respectively, from 18.4% and 9.0% in June. Monthly changes in July M1 and M2 appear to be flat. Formal preliminary estimates for the July numbers will be posted over the coming weekend (August 8th or 9th) on the "Alternate Data" tab at www.shadowstats.com.

As noted in the July 31st Flash Update, the continued slack in broad money growth highlights an intensifying systemic solvency crisis and an intensifying downturn in economic activity (irrespective of any recovery mania being generated by Wall Street and the popular media).

Week Ahead: June Trade Deficit.  Due for release Wednesday (August 12th), the June trade deficit should deteriorate, assuming oil imports reflect some catch-up in monthly paperwork flows. A major surprise in the data (a small deterioration appears to be expected) would impact the first revision of the second-quarter GDP estimate. A bigger deficit would mean a weaker GDP; a smaller deficit would mean a stronger GDP in revision.  

July Retail Sales. Due for release on Thursday (August 13th), July retail sales are expected to show a 0.3% gain, per Briefing.com, but the bulk of any increase should be due to inflation. Accordingly, look for continued month-to-month and year-to-year contractions net of inflation.

July Consumer Price Index (CPI). Due for release on Friday (August 14th), July CPI-U is expected to be unchanged per Briefing.com, but despite dips in monthly average oil and gasoline prices, there is upside risk against market expectations.

Given the significant reversal in seasonal factors that now will spike energy inflation sharply in the third quarter, and given rising relative year-to-year comparisons against last year’s collapsing oil prices (July excepted), July CPI inflation and monthly inflation the next several months should offer upside surprises to consensus expectations. Longer-range impact from likely intensified dollar weakness, a likely continued upswing in oil prices and an eventual upturn in broad money growth should tend to generate upside CPI pressures well into 2010.

Annual inflation would increase or decrease in July 2009 reporting, dependent on the seasonally-adjusted monthly change, versus the 0.72% adjusted monthly increase seen in July 2008.  The difference in growth would directly add to or subtract from June’s annual inflation rate of negative 1.43%.

July Industrial Production. Due for release on Friday (August 14th), July industrial production may be spiked by poor-quality seasonal factors, warped by auto industry disruptions, as discussed earlier. Unusually cool weather, however, could offset such distortions to a certain extent, where utility activity could decline and that would reduce production estimates based on electricity consumption. Beyond near-term monthly volatility, annual growth should continue at or close to historic lows.