No. 507: Gold & the DJIA, January Trade, Construction, Median Household Income
COMMENTARY NUMBER 507
Gold & the DJIA, January Trade, Construction, Median Household Income
March 7, 2013
The Dow Retook Its October 2007 High on March 5th;
Gold Was Up by 115% for the Same Period
Trade Deficit Deteriorates Anew
Inflation-Adjusted Construction Spending Shows No Recovery
Structural Consumer Liquidity Issues Continue to Constrain Economic Activity.
PLEASE NOTE: The next regular Commentary is scheduled for tomorrow, Friday, March 8th, covering February employment and unemployment, and the early estimate of February M3 growth (ShadowStats Ongoing M3 Estimate). Today’s unscheduled Commentary accelerates the release of some of the material intended initially for the March 8th missive.
Best wishes to all — John Williams
Opening Comments. Amid all the hoopla with the Dow Jones Industrial Average (DJIA) hitting a new high on March 5th, Wall Street and the popular financial media still largely ignore what has been one of the stronger asset classes for more than the last decade: gold.
Wall Street generally has done its best to avoid promoting investment in physical gold, where—unlike stocks—sales commissions are hard to generate. Further, the Fed and other central banks abhor—do their best to discourage—private investment in physical gold, where rising gold prices usually tell a tale of central bankers not doing their jobs. Former Fed Chairman Alan Greenspan properly looked at the price of gold as a leading indicator of inflation and as a measure of inflation expectations. Today, the Fed uses its self-serving, in-house forecasts of inflation expectations to alibi its highly inflationary policies. In any event, as Wall Street continues to celebrate new highs in the DJIA, the following analysis attempts to put some of the relative stocks versus gold numbers into perspective.
On March 5, 2013, the DJIA closed at 14,253.77 reclaiming and breaking its prior record-high closing level of 14,164.53 on October 7, 2007. That, of course is in nominal terms, before inflation adjustment. Based on the Bureau of Labor Statistics’ (BLS) CPI-U, consumer inflation has risen about 11.0% (allowing for a developing consensus headline CPI gain of roughly 0.5% for February 2013) since October 2007, which, in real terms, wipes out more than 1,400 points in the current DJIA level, versus October 2007. The inflation-adjusted terms look much worse using ShadowStats-alternate CPI measures, but the Wall Street-recognized inflation rate is used here so as to avoid any unnecessary contentiousness.
With the March 5th new high, the DJIA stood at 0.6% above its October 7, 2007 close. It is worth noting, however, that an investor who bought physical gold at the time of the last DJIA high, with the London afternoon fix at $736.00 per troy ounce on October 7, 2007, would have been ahead by 114.6% (119.0% for silver) as of the March 5, 2013 London afternoon fix of $1,579.75. That was a goodly gain, irrespective of how inflation is measured, and it was not an aberration.
The current good news for equity holders is in the context of the DJIA, after hitting its high in October 2007, it declined by 53.4%, hitting a cycle low of 6,594.55 on March 5, 2009. For those holding the DJIA on March 5, 2009, the March 5, 2013 high reflected a rebound of 116.1%. In the same period, gold rallied by only 73.0% (silver rallied by 120.0%).
Looking at a longer-term perspective, going back to the beginning of the prior decade, the DJIA stood at 11,497.12 and gold was at $290.25, as of December 31, 1999. As of the DJIA high on October 7, 2007, the DJIA had gained 23.2%, while gold was up by 153.6% (147.8% for silver) since the beginning of that decade.
Through March 5, 2013 closing prices, against the same on December 31, 1999, the DJIA was up by 24.0%, while gold was up by 444.3% (442.8% for silver). For the same period, headline CPI-U inflation was 37.5%, leaving the present-day real DJIA in negative territory, with nearly 3,900 points in the current DJIA offset by the officially-estimated CPI-U inflation, since December 31, 1999.
With the economy turning down anew, along with prospects of weaker corporate results and a U.S. government in fiscal and political turmoil, other than for open-ended efforts by the Fed at systemic liquefaction, the current fundamentals underlying the stock market are not strong.
The malfeasance of the U.S. government and the Federal Reserve in the handling of fiscal and monetary policy has been a primary driving force behind the spike in gold and silver prices of recent years. That malfeasance is getting much worse, at an escalating pace. It is not about to get better.
Executive Summary. On a month-to-month basis for January 2013, the trade deficit deteriorated and construction spending declined, while the January median household income reading (real/inflation-adjusted) and the February consumer sentiment and confidence numbers continued to show extreme structural distress in consumer liquidity. There is no suggestion in these data of a pending upturn in economic activity.
January 2013 Trade Deficit. Following the extreme month-to-month volatility seen in fourth-quarter trade activity, the January trade deficit opened 2013 with sharp deterioration to $44.4 billion, versus the $38.1 billion deficit in December, and against the $42.8 billion average for the fourth quarter. Disruptions from Hurricane Sandy likely accounted for some of the recent volatility, with distortions to the flow of trade and related paperwork. The widening of the monthly January trade deficit reflected both an increase in imports (largely oil related) and a decrease in exports versus December reporting.
The deterioration in the January trade deficit also was seen net of inflation. If February and March reporting come in at the same levels as January, the net contribution of first-quarter 2013 trade activity to first-quarter GDP growth would be negative. The prior-period revisions today to 2012 were minimal and did not suggest significant impact on the pending (March 28th) fourth-quarter 2012 GDP revision.
January 2013 Construction Spending. The trend of low-level stagnation in construction spending persisted in January, along with a continuing pattern of upside revisions to prior-period estimates. The 2.1% month-to-month decline in January spending likely reflected some reversal of a weather-related boost to December’s data. Still, the month-to-month decline in spending was statistically-significant, and the circumstance was more negative after adjustment for inflation.
ShadowStats.com is pleased to introduce and an inflation-adjusted version of the Census Bureau’s construction spending series. As shown in the preceding graph, real construction spending shows the economy slowing in 2006 and plunging into 2011, a with minimal upturn recently in an environment of low-level stagnation.
The graph shows the index levels of U.S. construction spending, both before and after adjustment for inflation, using the PPI new construction index as the deflator (deflation calculations by ShadowStats). The beginning points for both the nominal (not-adjusted-for-inflation) and the real (inflation-adjusted) indices have been set equal to each other, with January 2000 = 100. There is no perfect inflation measure for deflating construction, but the PPI new construction index is the closest found in publicly-available construction-inflation series.
The peak-to-trough contraction in the level of real activity from March 2006 to July 2011 was 49.0%. In January 2013, the level of real activity was up by 14.9% from the July 2011 trough, but it still was down by 41.5% from the March 2006 all-time high. The January 2013 level also remained well below the levels seen going into not only the 2007 recession, but also the 2001 recession.
Other Reporting: Consumer Liquidity Measures. As shown in the preceding graph, real (inflation-adjusted) median household income continued to stagnate in January 2013, near the low of the current cycle. The story has been and remains that household income continued to plunge in 2009 and beyond, with no recovery, despite the government’s claim of an ongoing economic recovery since June 2009.
This series, published by www.SentierResearch.com has been revised so as to deflate (remove the effects of inflation from) the nominal numbers using the seasonally-adjusted CPI-U. Previously the unadjusted CPI-U had been used. The difference in the reported pattern of activity is that the peaks and troughs are slightly less severe than before, but the general story is not changed, and basic graphic is little changed.
As discussed in Hyperinflation 2012 and No. 485: Special Commentary, consumer liquidity remains structurally impaired, and that forestalls the possibility of sustainable economic growth. That circumstance also puts the lie to the government’s claims of economic recovery since June 2009, and dashes any expectations or hype of a developing recovery in the broad economy.
On March 1st, the University of Michigan released its consumer-sentiment index for February 2013. The not-seasonally-adjusted series increased for the month, as had been seen previously with the Conference Board’s seasonally-adjusted consumer confidence measure (see Commentary No. 506). Nonetheless, the smoothing of the three-month moving has continued to move lower, as shown in the accompanying graphs of both series.
The plots show that both consumer sentiment and confidence remain at levels not seen outside of the depths of the most-severe historical recessions. Intensifying consumer liquidity problems remain primary constraints on sentiment and confidence, and on the ability—indeed the willingness—of the consumer to fuel sustainable growth in broad economic activity.
[More-complete details on the January trade deficit and construction spending
are found in the Reporting Detail section.]
Hyperinflation Outlook: Summary. This summary is intended for new subscribers or for those who otherwise are not familiar with the hyperinflation report or recent special commentaries, linked below. Those documents are suggested as background reading on the financial turmoil and currency upheaval facing the United States in the next year or two. The following text is unchanged from Commentary No. 505, of February 22nd. An update of this section is planned along with the Commentary due for March 15th, which will cover February inflation, retail sales and industrial production.
The November 27, 2012 Special Commentary (No. 485) updated Hyperinflation 2012 and the broad outlook for the economy and inflation, as well as for systemic stability and the U.S. dollar. These remain the two primary articles outlining current conditions and the background to the hyperinflation forecast. The basics have not changed here, other than events keep moving towards the circumstance of a domestic hyperinflation by the end of 2014. Nonetheless, a fully updated hyperinflation report is targeted for publication in the March to April time-frame.
The economic and systemic solvency crises of the last eight years continue. There never was an actual recovery following the economic downturn that began in 2006 and collapsed into 2008 and 2009. What followed was a protracted period of business stagnation that began to turn down anew in second- and third-quarter 2012. The official recovery seen in GDP has been a statistical illusion generated by the use of understated inflation in calculating key economic series. Nonetheless, the renewed downturn likely will gain recognition as the second-dip in a double- or multiple-dip recession.
What continues to unfold in the systemic and economic crises is just an ongoing part of the 2008 panic and near-collapse of the system at the time. All the extraordinary actions and interventions bought a little time, but they did not resolve the various crises. That the crises continue can be seen in deteriorating economic activity and in the panicked actions by the Federal Reserve, where it proactively is monetizing U.S. Treasury debt at a pace suggestive of a Treasury that is unable to borrow otherwise. As discussed in the Opening Comments section [of Commentary No. 505], hoopla to the contrary in the popular press, that the Fed might pull-back on its “easing,” most likely is designed to help firm-up the U.S. dollar and to soften gold in the immediate period running up to the looming crises in the federal-budget and debt-ceiling negotiations.
The Fed’s recent and ongoing liquidity actions also can be viewed as a signal of deepening problems in the banking system. As Mr. Bernanke admits, the Fed can do little to stimulate the economy, but it can create systemic liquidity and inflation. Nonetheless, the Fed’s easing moves have been an ongoing effort to prop-up the banking system and also to provide back-up liquidity to the U.S. Treasury.
Despite the near-term political hype that Congress will come up with a plan to balance the budget in a ten-year time frame, little but gimmicked numbers and further smoke-and-mirrors are likely to come out of the negotiations. Ongoing and deepening economic woes assure that the usual budget forecasts—based on overly-optimistic economic projections—will fall far short of fiscal balance and propriety. Furthermore, chances remain nil for the government addressing the GAAP-based deficit that hit $6.6 trillion in 2012, instead of the popularly followed, official cash-based accounting deficit in 2012 of $1.1 trillion, as discussed in No. 500: Special Commentary.
Efforts at delaying meaningful fiscal action, and at briefly postponing conflict over the Treasury’s debt ceiling, have bought the politicians in Washington minimal time in the global financial markets, but the patience in the global markets is near exhaustion. The continuing unwillingness and political inability of the current government to address seriously the longer-range U.S. sovereign-solvency issues, only pushes along the regular unfolding of events that eventually will trigger a domestic hyperinflation, as discussed in Commentary No. 491. The unfolding fiscal collapse, in combination with the Fed’s direct monetization of Treasury debt, eventually will savage the U.S. dollar’s exchange rate, boosting oil and gasoline prices, and boosting money supply growth and domestic U.S. inflation. Relative market tranquility likely will not last much longer, despite the tactics of delay by the politicians and obfuscation by the Federal Reserve. This should become increasingly evident as the disgruntled global markets begin to move sustainably against the U.S. dollar, despite any near-term gyrations. A dollar-selling panic is likely this year, with its effects and aftershocks setting hyperinflation into action in 2014.
U.S. TRADE BALANCE (January 2013)
Rising Imports and Falling Exports Widened the Trade Deficit in January 2013. In the context of continued 2012 revisions, and following the extreme month-to-month volatility seen in fourth-quarter trade activity, the January 2013 trade deficit deteriorated sharply to $44.4 billion, versus $38.1 billion December, and against the $42.8 billion average for the fourth quarter. Some of the recent data volatility likely was due to disruptions from Hurricane Sandy.
The widening of January trade-deficit also was seen net of inflation. If the February and March numbers were the same as January’s, first-quarter 2013 net trade activity would subtract from growth in first-quarter 2013 GDP. Monthly revisions in 2012 were minimal and did not suggest any significant impact on the pending fourth-quarter 2012 GDP revisions.
Nominal (Not-Adjusted-for-Inflation) Trade Deficit. In the context of another round of monthly revisions for the full year of 2012, the Bureau of Economic Analysis (BEA) and the Census Bureau reported today, March 7th, that the nominal, seasonally-adjusted monthly trade deficit in goods and services for January 2013, on a balance-of-payments basis, widened to $44.4 billion, from a revised $38.1 (previously $38.5) billion in December 2012. The January 2013 deficit, however, narrowed from $52.3 billion in January 2012.
The monthly trade deterioration reflected an increase in imports as well as a decline in exports. Most of the monthly import increase was seen in oil.
Crude Oil and Energy-Related Petroleum Products. For the month of January 2013, the not-seasonally-adjusted average price of imported oil declined for the third month, easing to $94.08 per barrel, from $95.16 in December 2012, and it was down from an average of $103.81 in January 2012. Based on recent oil-market behavior, though, the pattern of declining oil prices on imported oil should reverse in the months ahead.
In terms of not-seasonally-adjusted physical oil imports, January 2013 volume averaged 8.411 million barrels per day, up from 7.189 million in December 2012, but down from 8.733 million barrels per day in January 2012.
Other Cautions on Data Quality. Cautions continue as to potentially heavy distortions in headline data from seasonal adjustments, much as has been seen in other economic releases, such as retail sales and payrolls, where the headline number reflects month-to-month change. As has been discussed frequently (see Hyperinflation 2012 for example), the extraordinary length and depth of the current business downturn have disrupted regular seasonality patterns. Accordingly, the markets should not rely heavily on the accuracy of the monthly headline data.
Real (Inflation-Adjusted) Trade Deficit. Adjusted for seasonal factors and net of oil-price swings and other inflation (2005 chain-weighted dollars as used in reporting real GDP), the January 2013 merchandise trade deficit (no services) came in at $48.0 billion, versus a revised $44.2 (previously $41.1) billion in December 2012. As happened last month, all the monthly data again were revised for the year of 2012.
Nonetheless, the net revisions to the third- and fourth-quarter 2012 annualized real trade deficits were minimal, suggestive of negligible impact on the second revision to fourth-quarter 2012 GDP, due for release on March 28th. The revised fourth-quarter 2012 real trade deficit now stands at an annualized pace of $568.1 (previously $567.8) billion dollars, versus an unrevised $566.2 billion in the third-quarter. The January 2013 monthly deficit—the first indication of first-quarter 2013 trade activity—annualizes to $576.5 billion, a net deterioration versus the fourth-quarter estimate. That provides an early indication of a possible, negative trade contribution to the “advance” estimate of first-quarter 2013 GDP, due at the end of April.
CONSTRUCTION SPENDING (January 2013)
January’s Decline in Construction Spending Reflected Unstable Reporting and Revisions, as Activity Continued to Stagnate. The trend of low-level stagnation in construction spending was seen again in January, along with a continuing pattern of upside revisions to prior-period estimates. The month-to-month decline in January spending likely reflected some reversal of the relative boost to December’s data from unseasonably warm weather. Where the month-to-month decline in spending was statistically-significant, the circumstance was more negative after adjustment for inflation.
Introduction of a Seasonally-Adjusted Construction Spending Series. Shown in the Opening Comments section is a new feature of ShadowStats reporting, an inflation-adjusted version of the construction spending series. There is no perfect inflation measure for deflating construction, but the PPI new construction index is the closest found in publicly available series. Adjusted for the PPI construction inflation measure, construction spending shows the economy slowing in 2006, plunging into 2011, and turning minimally higher in an environment of low-level stagnation (see the Executive Summary section).
Official Reporting. The Census Bureau reported March 1st that the total value of construction put in place in the United States during January 2013 was $883.3 billion, on a seasonally-adjusted—but not inflation-adjusted—annual-rate basis. That estimate was down for the month by a statistically-significant 2.1% +/- 1.5% (all confidence intervals are at a 95% level), from an upwardly revised $902.6 (previously $885.0) billion in December 2012. Before prior-period revisions, the monthly January decline was a drop of 0.1%. In revision, December spending rose by 1.1% (previously a gain of 0.9%). Adjusted for the PPI construction index inflation measure, aggregate spending in January declined by 2.8% for the month, following a 1.2% gain in December.
January 2013 construction spending was up year-to-year by a statistically-significant 7.1% +/- 2.1%, December annual growth revising to 10.0% (previously 7.8%). A portion of January’s 7.1% annual gain was accounted for by increases in actual construction costs, with the PPI current construction index indicating 1.5% related year-to-year inflation.
The statistically-significant 2.1% decline in monthly January 2013 construction spending included a 1.0% drop in public construction spending, which had revised to a 1.0% (previously 1.4%) decline in December. January private construction fell by 2.6% for the month, versus a revised 2.1% previously 2.0%) monthly gain in December. The accompanying graphs show the 2.1% monthly drop in January total construction, with private residential construction unchanged, private nonresidential construction down by 5.1% and public construction down by 1.0% for the month.
The next two graphs reflect total construction spending through January 2013, the first is before inflation adjustment, the second is an aggregate index reflecting inflation-adjusted data. The third graph reflects the January 2013 reporting of construction employment, per the Bureau of Labor Statistics. The construction employment graph will be updated with the March 8th Commentary No. 508.
The next two graphs cover private residential construction, along with housing starts, as reported for January 2013 (see Commentary No. 504 for detail). The difference in the graphs is the smoother pace of actual spending (not-adjusted-for-inflation), instead of the more-irregular monthly variation in the count of physical monthly starts.
The last two graphs in this series, preceding, show the patterns of activity in private nonresidential construction spending and in public construction spending. The public construction spending is 98% nonresidential.
Weaker Economic and Stronger Inflation Data Are Likely. Beyond the dissipating effects of the repair, replacement and reconstruction activity generated by Hurricane Sandy, and in anticipation of the likely negative impact of expanded QE3 and the ongoing fiscal crisis/debt-ceiling negotiations on the currency markets, reporting in the months and year ahead generally should reflect higher-than-expected inflation and indicate weaker-than-expected economic results. Increasingly, previously unreported economic weakness should continue to show up in prior-period revisions.
Significant reporting-quality problems continue with most major economic series. Headline reporting issues remain tied largely to systemic distortions of seasonal adjustments, distortions that have been induced by the still-ongoing economic turmoil of the last five years. The recent economic collapse has been without precedent in the post-World War II era of modern economic reporting. These distortions have thrown into question the statistical-significance of the headline month-to-month reporting for many popular economic series. In any event, where reported numbers are too far removed from common experience, they tend to be viewed by the public with extreme skepticism.
Still, recognition of an intensifying double-dip recession continues to gain, while recognition of a mounting inflation threat has been rekindled by the Fed’s monetary policies. The political system would like to see the issues disappear, and it still appears to be trying to work numerical slight-of-hand with series such as the GDP and related projections of the federal budget deficit. The media do their best to avoid publicizing unhappy economic news or, otherwise, they put a happy spin on the numbers. Pushing the politicians and media, the financial markets and related spinmeisters do their best to avoid recognition of the problems for as long as possible, problems that have horrendous implications for the markets and for systemic stability, as discussed in Hyperinflation 2012 and No. 485: Special Commentary.
Employment and Unemployment (February 2013) UPDATED. The February labor data are due for release tomorrow, Friday, March 8th, from the Bureau of Labor Statistics (BLS). Most commonly, the consensus jobs estimate settles around the trend estimate that comes out of the BLS seasonal-adjustment models. The February 2013 payroll trend number is for a 158,000 jobs gain, as discussed in in Commentary No. 499, and the consensus appears to have settled above that number, in the vicinity of 160,000 to 170,000 new jobs, a little higher than January’s headline gain of 157,000. The markets appear to expect the unemployment rate to hold at the 7.9% headline U.3 number of January 2013.
Where underlying fundamental economic activity remains weaker than consensus, the employment and unemployment numbers should be weaker than market expectations, perhaps at zero growth, within the usual reporting-error margin of zero +/- 129,000 jobs for payrolls. The unemployment rate should move higher, but as discussed frequently with this series (see Commentary No. 451 and Commentary No. 487, for example), the month-to-month comparisons of the unemployment data cannot be made legitimately, where the headline change in rate is of no meaning, other than in misguided-media and market reactions to same. Specifically, all the recent historical unemployment rates are re-calculated each month as part of the concurrent seasonal adjustment process, but where the BLS publishes the new headline unemployment rate, it does not publish and does not make available the revised, consistent number from the month before.