U.S. Economy Continues to Falter as Investor Concerns Mount as to Soundness of U.S. Dollar.  Relative economic, political and fiscal strength and stability are key supports for any currency, and the U.S. dollar increasingly is in trouble.  The latest numbers show faltering economic activity and mounting criticism of the sitting government (weak presidential approval ratings often lead dollar weakness). Presumptions of ongoing economic "recovery" are vanishing, and fears are increasing as to what the federal government and the Federal Reserve will have to do in order to maintain systemic stability.  While actions taken may provide short-lived relative stability, the cost of same will be an extreme inflation problem.  The broad outlook remains as outlined in Commentary No. 323.

Although possibly independent of Fed Policy, money supply M2 — the broadest money measure now formally tracked by the Fed — has begun rising regularly (seasonally-adjusted) on a weekly basis since the 4th of July, at an annualized pace of 7.8%.  The impact on M3 has been positive but muted, with year-to-year M3 change down 4.3% as of August.  Going forward, the Fed will have no choice but to liquefy the system massively, as the federal government will have no choice but to spend well beyond its means in supporting the political, social and financial infrastructure threatened by ongoing economic collapse. 

Selling pressure against the U.S. dollar, with a resulting dollar-supportive intervention by the Bank of Japan, and rallying gold and silver prices all suggest a shift in sentiment against the U.S. currency that has started to pick up momentum.  A long-term debasement of the U.S. dollar remains inevitable, despite any near-term market volatility (possibly extreme) in the currencies and precious metals that could be triggered and/or encouraged by central banks.

 

As suggested by the graphs, the gold market continues to look beyond short-term volatility in the financial markets and consensus hype, with the upside distortions in the U.S. dollar’s exchange rate beginning to reverse.  The downside distortions to oil prices are likely to begin reversing, too, in tandem with any significant new weakness seen in the U.S. dollar.

 

No Increase in Social Security COLA Likely, Again, Despite Higher Inflation.  Although annual inflation in the CPI-W has averaged around 1.5% for July and August (two of the three months used in the annual cost-of-living-adjustment for Social Security payments) there likely will be no adjustment this year, shy of an act of Congress.  The problem is that last year’s CPI-W was lower in third-quarter 2009 than it was in third-quarter 2008.  Although the inflation was negative, the COLA was unchanged — not reduced — and the COLA will not kick in again until the base period once more exceeds third-quarter 2008.  As best I can figure it, the CPI-W would have to jump about 2%, seasonally-adjusted, from August to September, just to get the CPI-W measure to par, and such a monthly change is not likely at present.  Nonetheless, August CPI reporting was a little stronger than consensus.

CPI-U.  The BLS reported Friday (September 17th) that the seasonally-adjusted August CPI-U rose by 0.25% (up by a statistically-significant 0.14%, unadjusted) +/- 0.12% (95% confidence interval, not seasonally adjusted) for the month, after a 0.31% gain (up 0.02% unadjusted) in July.  Seasonally-adjusted, the CPI-U annualized rate of inflation for the three months ended August 2010 (August versus May) was 1.72%, against July’s virtually flat gain of 0.03%.  As the three-month spread crossed the changeover in monthly seasonal-adjustment impact on gasoline prices, unadjusted, the CPI-U annualized rate of inflation for the three months ended August 2010 was 0.25%, against July’s flat reading.

Unadjusted, August’s year-to-year inflation was 1.15% +/- 0.20% (95% confidence interval) against a 1.24% annual increase in July.

Year-to-year inflation would increase or decrease in next month’s September 2010 reporting, dependent on the seasonally-adjusted monthly change, versus the 0.06% adjusted monthly gain seen in September 2009.  I use the adjusted change here, since that is how consensus expectations are expressed.  To approximate the annual inflation rate for September 2010, the difference in September’s headline monthly change (or forecast of same) versus the year-ago monthly change should be added to or subtracted directly from August 2010’s reported annual inflation rate of 1.15%.

CPI-W.  The narrower, seasonally-adjusted August CPI-W rose by 0.35% (up 0.14% unadjusted) for the month, following a gain of 0.37% (0.03% unadjusted) in July.  Seasonally-adjusted, the annualized rate of CPI-W inflation for the three months ended August 2010 (August versus May) was a gain of 2.15%, versus a contraction of 0.37% in July.  Unadjusted, the CPI-W annualized rate of inflation for the three months ended August 2010 was a gain of 0.15%, against a July loss of 0.11%.

Unadjusted year-to-year CPI-W inflation rose by 1.44% in August, versus a 1.60% July increase.

C-CPI-U.  The Chain-Weighted CPI-U — the fully substitution-based series that gets touted by CPI opponents and inflation apologists as the replacement for the CPI-U — is reported only on an unadjusted basis.  Unadjusted, the C-CPI-U annualized rate of inflation for the three months ended August 2010 (August versus May) was a 0.31% contraction, against July’s 0.54% contraction.  Year-to-year, or annual inflation, was plus 0.90% in August 2010, versus a 1.02% gain in July.

Alternative Consumer Inflation Measures. Adjusted to pre-Clinton (1990) methodology, annual CPI inflation was roughly 4.5% in August 2010, the same level as in July, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, was about 8.5% (8.50% for those using the extra digit) in August, versus 8.6% in July.

The SGS-Alternate Consumer Inflation Measure adjusts on an additive basis for the cumulative impact on the annual inflation rate of various methodological changes made by the BLS (the series is not recalculated).  Over the decades, the BLS has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that no longer reflects the constant-standard-of-living concept.  Roughly five percentage points of the additive SGS adjustment reflect the BLS’s formal estimate of the annual impact of methodological changes; roughly two percentage points reflect changes by the BLS, where SGS has estimated the impact not otherwise published by the BLS.

Gold and Silver Highs Adjusted for CPI-U/SGS Inflation.  Despite today’s (September 17th) historic high gold price of $1,274.00 per troy ounce (London afternoon fix), gold and silver prices have yet to approach their historic high levels, adjusted for inflation.  The earlier all-time high of $850.00 (London afternoon fix, per Kitco.com) of January 21, 1980 would be $2,385 per troy ounce, based on August 2010 CPI-U-adjusted dollars, and would be $7,758 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars (all series not seasonally adjusted). 

In like manner, the all-time high price for silver in January 1980 of $49.45 per troy ounce (London afternoon fix, per silverinstitute.org) has not been hit since, including in terms of inflation-adjusted dollars.  Based on August 2010 CPI-U inflation, the 1980 silver price peak would be $139 per troy ounce and would be $451 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars (again, all series not seasonally adjusted).

As shown on page 22 in the Hyperinflation report, over the decades, the price of gold has compensated for more than the loss of the purchasing power of the U.S. dollar as reflected by CPI-U inflation, while it has effectively fully compensated for the loss of purchasing power of the U.S. dollar based on the SGS-Alternate CPI.

Real Money Supply M3.  The signal of the still unfolding intensification of the economic downturn, based on annual contraction in the real (inflation-adjusted) broad money supply (M3), most recently was discussed and graphed in Commentary No. 323.  The real contraction in August M3 (SGS-Ongoing) estimated for that Commentary was 5.5%.  Based on today’s CPI-U report and final estimate on the August SGS-Ongoing M3 Estimate, that annual contraction was 5.4%, narrower than July’s 6.6% contraction, and May’s post-World War II record annual decline of 7.9%.

The signal for a downturn or an intensified downturn is generated when annual growth in real M3 first turns negative in a given cycle; the signal is not dependent on the depth of the downturn or its duration.  The current downturn signal was generated in December 2009.  The broad economy tends to follow in downturn or intensification roughly six to nine months after the signal.

Real Retail Sales.  Based on August 2010 CPI-U reporting, inflation- and seasonally-adjusted monthly August retail sales increased by 0.16%, where before inflation adjustment the current number was up by 0.42%, versus a revised real monthly 0.03% contraction (was a gain of 0.10%) in July.  Despite the small monthly real gain in August retail sales — other than July’s weakened reporting — the August level of activity was the lowest since March 2010.

August real retail sales rose at a softer year-to-year pace of 2.47%, versus the downwardly revised 4.07% (was 4.15%) annual gain initially reported for July.

On a quarter-to-quarter basis, real retail sales in second-quarter 2010 expanded at a 5.3% annualized pace, down from annualized growth of 6.6% in the first-quarter.  Adjusted for inflation, seasonally-adjusted monthly retail sales in July and August were down at annualized pace of 1.1% versus the second-quarter, increasing the odds of a quarterly contraction in third-quarter retail sales.

Since November 2008, monthly real retail sales (CPI-U deflated) have been fluctuating around an average of $162.4 billion (the deflated August number was $166.7 billion).  The first graph below reflects the relatively volatile monthly levels of real retail sales, as reported.

Smoothed for the monthly volatility on a six-month moving-average basis, as shown in the second graph, the pattern of activity here has been one of bottom-bouncing in terms of the level of inflation-adjusted sales.  The recent bounce from short-lived stimulus factors and warped-seasonals appears largely to have run its course, with the average close to rolling over, and with continued lower real sales levels likely in the months ahead.  There has been no change in underlying fundamentals that would support a sustainable turnaround in personal consumption or in general economic activity — no recovery — just general bottom-bouncing.

 

 

 

August PPI Inflation Boosted as Energy Seasonal Factors Reverse.  Seasonally-adjusted inflation at the wholesale and production level also rose month-to-month in August, slightly above expectations, helped by catch-up in seasonal factors that now are spiking monthly energy inflation, instead of suppressing same, as seen in recent months.

As reported yesterday (September 16th) by the Bureau of Labor Statistics (BLS), the regularly-volatile, seasonally-adjusted finished-goods producer price index (PPI) in August rose by 0.4% (down by 0.1% before seasonal adjustment) month-to-month, following July’s gain of 0.2% (up by 0.3% unadjusted).  Unadjusted and year-to-year, August’s annual PPI inflation was 3.1%, somewhat softer than the annual inflation rate of 4.2% reported for July.

On a monthly basis, seasonally-adjusted August intermediate goods rose by 0.3% (down by 0.4% in July), with August crude goods rising by 2.3% (up by 2.7% in July).  Year-to-year inflation in August intermediate goods was up by 5.0% (a 6.4% gain July), with August annual inflation in crude goods up by 18.3% (up by 20.5% in July).

Downside Revisions Dominate August Production Reporting.  As was seen in August industrial production and retail sales reporting, weaker economic activity increasingly is being revised into prior-period reporting, with the effect that the current month’s headline number gets a relative boost it would not have had otherwise.  Similar reporting patterns were seen when the current downturn began to deepen seriously but went unrecognized by consensus forecasters.  While this pattern of activity helps the data come in closer to generally overly-optimistic economic consensus estimates, at fault likely are underlying assumptions of ongoing economic "recovery," assumptions that provide an upside bias in initial reporting, with some correction in near-term revisions.  Specifically, with headline August production growth of 0.2% for the month, it was a contraction of 0.2% before the revisions to July and earlier.  In like manner, August’s headline retail sales gain of 0.4% was 0.3% before revisions to July and earlier.  These patterns likely will become increasingly common in the months ahead.

The Federal Reserve Board reported Wednesday (August 15th) that seasonally-adjusted August 2010 industrial production rose by 0.16% (down by 0.21% before revisions to July’s initial reporting), versus a downwardly revised monthly gain of 0.63% (previously a 0.99% increase) for July.

The year-to-year change in August production eased back to 6.21% from July’s downwardly revised 7.35% (previously a 7.74% pace).  The relatively high volatility in annual growth is due largely to the pattern of collapsing activity a year ago (a May 2009 trough), followed by cash-for-clunkers boosted production.  The year-to-year contraction of 12.86% seen in May 2009 was the steepest annual decline in production growth since the shutdown of war-time production following World War II. 

The first graph following shows recent monthly detail, with a fair chance that the August number — net of eventual revisions — will mark the turning point of renewed decline in the production series.

The "recovery" in production is shown in the second graph, where month-to-month volatility is smoothed using a six-month moving average.  For the last 20 months, the production index has averaged 89.35, around which the series has been fluctuating, with August’s six-month moving average reading at 92.26 versus 93.21 for the single month.  Production activity had leveled off at a low-level plateau of activity that effectively wiped out the last eight years of growth in industrial production; the current rally almost reclaimed the pre-2001 recession high (six-month moving average). 

 

 

 

 

Despite the near-term upside gains generated by short-lived stimulus and seasonal-factor distortions, the series likely still is bottom-bouncing and should begin to soften anew, significantly, in the next several months.  The six-month moving-average series remains 9.19% below its December 2007 historic high.