Economic and Liquidity Update

July 9, 2010


Shills for Wall Street Are Busy

Broad Liquidity Measures Remain Abysmal

Unemployment Trends Show Severity of the Depression



PLEASE NOTE: The next regular Commentary is scheduled for Wednesday, July 14th, following the release of June retail sales. A subsequent Commentary will be published on Friday, July16th, after release of the June CPI data. The latter Commentary also will assess the PPI and industrial production releases of July 15th.

– Best wishes to all, John Williams


The Recovery Hucksters Are Working Overtime. Following the sharpest and longest economic contraction since World War II, and after nearly a year of bottom-bouncing at a low-level plateau of business activity, the economy has entered a phase of re-intensifying downturn, a circumstance that may be referred to more popularly as renewed recession, or a double-dip recession. Such has begun to surface in a broad range of economic reports, and it is consistent with signals of pending business deterioration that have been seen in collapsing measures of broad systemic liquidity. 

Recognition of this circumstance should become more commonplace in the months ahead, as more confirmation is seen in underlying economic reporting. Consensus forecasts for regular economic releases (see the Week Ahead section) already are softening to levels that would have been inconceivable three months ago within much of the popular financial press.

Quality Issues. Complicating the outlook, though, are some seriously flawed monthly reports, which have become victims of reporting-system distortions resulting from the severity of the contraction. Modern economic reporting — that of the post-World War II era — was structured using assumptions and modeling for a system enjoying regular, sustainable economic growth, with occasional downticks from inventory-driven business cycles. The system never was designed to handle a structural downturn of the current length and depth. Such has thrown off seasonal factors and even traditional year-to-year comparisons used in assessing the economic environment, let alone fundamental misdirection as discussed below in the unemployment comments.

Wall Street Shills. Further complicating the outlook is a more traditional issue: pronouncements by some economists on Wall Street and financial reporters in the popular media, who act as shills for the needs of Wall Street and political Washington. While there are a number of fine and honest economists and financial reporters in their respective fields, there also are those — often very heavily publicized — who spew Pollyannaish nonsense aimed at affecting public sentiment and/or the financial markets during troubled economic times.   

Let me recount two personal experiences. Back in late-1989, I contended that the U.S. economy was in or headed into a deep recession. CNBC had me in to discuss my views along with a senior economist for a large New York bank, who was looking for continued economic growth. Before the show, the bank economist and I shared our views in the Green Room. I outlined my case for a major recession, and, to my shock, his response was, "I think that pretty much is the consensus."

We got on the air, I gave my recession pitch, and he proclaimed a booming economy for the year ahead. He was a good economist and knew what was happening, but he had to put out the story mandated by his employer, or he would not have had a job.

More recently, following an interview on a major cable news network (not CNBC), I was advised off-air by the producer that they were operating under a corporate mandate to give the economic news a positive spin, irrespective of how bad it was.

I know from other personal experiences that these circumstances are commonplace. A simple example of recent distortion was yesterday’s positive hype over an unexpectedly-low weekly jobless claims number. Widely known — at least I have discussed the matter frequently — is that the Department of Labor cannot adjust the weekly claims numbers meaningfully for regular seasonal variations. Accordingly, reporting around holidays invariably results in unusually large and unexpected swings in the weekly numbers. Yesterday’s data covered the onset of the Fourth of July weekend. It would not be at all unusual to see a similarly-meaningless reverse-gyration in next week’s release.

Consumer Liquidity Squeeze Continues.  The Federal Reserve publishes a number of widely followed economic series that are broadly based in sampling and reporting. Nonetheless, the Fed’s series go through major revisions quite frequently, with the money supply and consumer credit outstanding going through major revisions this last week. The revisions to money supply measures M1 and M2 went back decades, but the year-to-year patterns of change still were intact. The same was true with revisions to institutional money funds, which, along with M2, is a major component of the SGS-Ongoing M3 estimate. Following tonight’s release of banking data, we shall publish the preliminary estimate for June’s monthly M3, as well as all revisions necessitated by the Fed’s revisions, on the Alternate Data page for M3.

Plotted below is the year-to-year change in real (inflation-adjusted) M3 (updated for the Fed’s revisions) versus U.S. recessions, as recognized by the National Bureau of Economic Research. Whenever annual real change in M3 has turned negative, the economy always has fallen into recession, or if already in recession, the economy has entered a period of intensified downturn, usually within six to nine months of the initial M3 downturn. The signal for economic trouble ahead is the annual real M3 growth first turning negative, as happened in December 2009.

Chart of Real (Inflation Adjusted) M3


The pattern in the recent money supply growth, to a large extent, is due to contracting credit.  Growth in credit is needed to expand money growth. Contracting credit leads to a slow leak in the money supply, as some existing loans do not get rolled over, and new extensions of credit are too limited.

The three graphs following reflect the extension of short-term credit to consumers and to businesses. All continue to show ongoing record contractions. Of some interest were the revisions published along with yesterday’s (June 8th) publication of May consumer credit outstanding. What had been reported as a small monthly gain in April’s consumer credit revised to a sharp monthly contraction, along with a subsequent contraction in May. Such might be suggestive of a pending downside revision in recent retail sales reporting. 

Chart of Consumre Credit

Chart of Commercial Loans

Chart of Commercial Paper Outstanding


The structural problem driving the current business downturn — a liquidity-impaired consumer — shows no signs of improvement (see the Consumer Liquidity Special Report). Real household income remains too weak to support sustained positive real economic growth, by itself, and consumer debt expansion that could help make up the consumption shortfall generally is not available.

Time to Move Headline Reporting from U.3 to U.6 or a Broader Measure. A number of subscribers wrote to me about the reported decline in the U.3 unemployment rate from 9.7% in May to 9.5% in June, which reflected a drop in the labor force due to a large number of unemployed giving up looking for a job.  These people are disappearing from the numbers only because the headline U.3 number does not account for discouraged workers. The pattern is one that generally is an ongoing artifact of the severity of the current economic contraction. While mentioned in Commentary No.307’s text as to the indication of an increasing number of discouraged workers, I did not go into great detail because I believed the June data were distorted meaningfully by the handling of the volatile employment of the temporary and intermittent 2010 census workers.

Nonetheless, there is a big-picture element involved, where those disappearing from the U.3 unemployment roles are moving into the broader U.6 and SGS unemployment measures. Where U.6 includes short-term discouraged workers (those who have not looked for work in the last four weeks, but have looked in the last year), the SGS measure includes U.6 plus the long-term discouraged workers (those who have not looked for work for more than a year, a category defined out of existence by the Bureau of Labor Statistics [BLS] in 1994). The severity and impact of the current downturn needs to be measured, which the U.3 does not, but the broader unemployment estimates do to a certain extent. 

With relatively briefer and shallower downturns in the past, the BLS rarely faced a public outcry over the use of U.3. With increasing recognition by the public of the reporting inadequacies, however, the time appears to be at hand for the BLS to put aside political convenience and, perhaps, to headline its U.6 measure as a better reflection of what is happening to the unemployment circumstance in the United States.

The following charts are snapshots taken from our new "Chart Library," and tend to tell the same story, irrespective of how they are viewed. The charts in the library are generated from official statistics as released (and in some cases, when noted, augmented by SGS Alternate Data). The library currently holds a number of Employment and Unemployment charts, as well as the long-running Money Supply and Monetary Base charts. We will be releasing new charts and new areas in the coming weeks. 

Chart: U.3 Unemployment Duration

Chart: U.3 Unemployment Duration

Chart: U.3 Unemployment Duration

As a testament to the severity and extreme duration of the current downturn, the first three graphs reflect, in particular, the volume and portion of persons who have been unemployed for 15 weeks or more. Whether viewed in terms of number of people, as a percent of the labor force, or as a percent of unemployed people, the current circumstance is the worst ever seen in the history of the data. The current circumstance is without modern precedent.

These numbers, however, reflect only those individuals counted in the U.3 unemployment numbers and U.3 labor force. Reflecting discouraged workers would make the situation look even worse — much worse — which is the unfortunate reality.

The next two graphs reflect patterns of declining participation of the population in the workforce during the last decade. The first shows the household labor force as a percent of the working age population. Again, this just the U.3 labor force, the total of U.3 employed plus U.3 unemployed. Even allowing for shifting retirement patterns with an ageing baby-boomer population, a fair portion of the lost workforce likely has just moved into the broader U.6 and SGS-Alternate workforces.

The second graph reflects an even greater drop in participation as measured by using payroll employment versus the working age population. Although the numerator and denominator are not fully compatible, the pattern nonetheless is interesting. Both of the charts are broadly in line with what is suggested by the SGS Alternate Unemployment Rate.

  Chart: U.3 Labor Force Participation Rate

Chart: U.3 Unemployment Population Ratios

 I plan to have in place — before the July employment and unemployment reporting — charts that will reflect the detail of the above graphs with the inclusion of the universes of both the short- and long-term discouraged workers. I also plan to review at that time the impact of illegal immigration on the national employment and unemployment circumstance.

Week Ahead. Given the unfolding reality of a weaker economy (or re-intensifying downturn) and more serious inflation problems than generally are expected by the financial markets, risks to reporting will tend towards higher-than-expected inflation and weaker-than-expected economic reporting in the months ahead. Such is true especially for economic reporting net of prior-period revisions.

Retail Sales (June 2010). Due for release on Wednesday, July 14th, June retail sales are expected to show a 0.2% monthly contraction (per, following an initial 1.2% drop reported in May sales. Reporting risk is to the downside of expectations.

Industrial Production (June 2010). Due for release on Thursday, July 15th, June industrial production is expected to slow to a 0.2% monthly gain (, versus an initial estimate of a 1.3% gain in May. As with most economic series — until the consensus begins to catch up with weakening reality — reporting risk is to the downside of expectations.

Producer Price Index — PPI (June 2010). Reflecting the spread of inflationary pressures from earlier oil-price strength, and otherwise, and from shifting seasonal adjustment factors, expectations are for a monthly increase of 0.1% in the June PPI (, versus a 0.3% contraction in May. The series is irregularly volatile, but has some upside reporting risk.

Consumer Price Index — CPI (June 2010). A small gain in monthly oil prices, but a decline gasoline prices should dampen the seasonally-adjusted monthly change in the June CPI-U, due for release on Friday, July 16th, while the seasonal-factor biases on gasoline prices turn from negative to flat/positive. reports a consensus expectation of 0.0%, versus the 0.2% monthly decline reported in May. The reported number could go either way against the consensus, but with risk somewhat to the upside. The shifting seasonal factors will begin spiking adjusted gasoline prices sharply to the upside in July.

Year-to-year inflation would increase or decrease in June 2010 reporting, dependent on the seasonally-adjusted monthly change, versus the 0.71% adjusted monthly gain seen in June 2009. I use the adjusted change here, since that is how consensus expectations are expressed. To approximate the annual inflation rate for June 2010, the difference in June’s headline monthly change (or forecast of same) versus the year-ago monthly change should be added to or subtracted directly from May 2010’s reported annual inflation rate of 2.02%. Hence a consensus, unchanged month-to-month seasonally-adjusted CPI-U would result in an annual inflation rate of roughly 1.3%.