The Recession Is Over? Both the Federal Reserve Board (FRB) and the St. Louis Fed are reflecting a mid-2009 end to the recession, which I refer to variously as the ongoing severe economic downturn, depression, etc. The FRB shows an April or May 2009 end in its industrial production graphs, and the St. Louis Fed shows the last month of recession as of July in its graphics. A call to the FRB for comment as to precise timing and as to whether the Fed had consulted with the National Bureau of Economic Research (NBER), official arbiter of U.S. recession timing, was not answered before my going to press. As of this writing, the NBER has not declared the recession to be over, although such could follow at any time. If one recession is completed, then the intensified downturn that will follow in early 2010 (see Commentary No. 268 of December 30th) will be viewed as a double-dip. If the intensified economic problems become evident soon enough, however, the NBER might forestall the happy news that the economy is in a faux recovery that will be shockingly brief.

With the trade data slightly negative for the fourth-quarter GDP, the heavily distorted retail sales (strong positive bias from late-year seasonal factor distortions) and the reported gains in industrial production are consistent with a positive quarter-to-quarter growth rate in the pending "advance" estimate of the fourth-quarter GDP. Something in the 4% to 4.5% annualized inflation-adjusted growth range would be ridiculous, but some forecasts are in that area. A full breakout of what the key economic indicators are showing will follow in the pending newsletter.

On the inflation front, the CPI-U annual inflation rate jumped to 2.7% (3.4% for the CPI-W). The CPI-U rate was enough to generate a 3.5% annual contraction in real M3, which, again, is signaling an intensified downturn ahead (I had used a conservative initial estimate of a 3.2% contraction for Commentary No. 268). As the real annual decline in M3 continues to deepen, the annual pace of contraction could be greater than 5% for January 2010. At the same, as shown below, the Fed has pulled back a little from the panicked level of systemic liquefaction in place a month ago. The latest monetary developments, seasonal-factor issues and Fed policy limitations also will be reviewed in the forthcoming newsletter.

Annual Inflation Jumped Again. With the December 2009 CPI reporting in place, the inflationary and deflationary problems surrounding the surge and subsequent collapse of oil prices in 2008 has worked its way through the system, leaving annual CPI-U inflation somewhat shy of 3%. What follows in the months ahead will be still higher annual inflation, with the pace picking up in response to Mr. Bernanke’s efforts at formal U.S. dollar debasement, a further weakening of the U.S. dollar and a resulting continued spike in oil and energy prices, as a well as in other dollar-denominated commodities. That inflation will come from monetary policy decisions, not from strengthening economic demand in the United States,

CPI-U.  The BLS reported this morning (January 15th) that the seasonally-adjusted December CPI-U rose by 0.13% (down by 0.18% unadjusted) +/- 0.12% (95% confidence interval not seasonally adjusted) for the month, after rising by 0.40% (up by 0.07% unadjusted) in November. Seasonally-adjusted, the CPI-U annualized rate of inflation for the three months ended December was 3.28%, versus 3.43% for the three months ended November. The seasonally-adjusted annualized quarter-to-quarter inflation was 3.44% in the fourth-quarter versus 3.60% in the third.  

Unadjusted, December year-to-year inflation turned increasing positive, up by 2.72 +/- 0.20% (95% confidence interval) against a 1.84% annual increase in November. The average CPI-U for 2009 versus 2008 showed a contraction of 0.36% compared with a 3.84% gain in 2008 versus 2007.

Year-to-year inflation would increase or decrease in January 2010 reporting, dependent on the seasonally-adjusted monthly change, versus the 0.28% adjusted monthly gain seen in January 2009.  I use the adjusted change here, since that is how consensus expectations are expressed. To approximate the annual inflation rate for January 2009, the difference in January’s headline monthly change versus the year-ago monthly change should be added to or subtracted directly from December 2009’s annual inflation rate of 2.72%.

For those interested in exploring the various facets of official CPI-U reporting, I continue to refer you to CPIwatch.com, a site prepared by one of my SGS colleagues.

CPI-W.  The BLS reported that the narrower, seasonally-adjusted December CPI-W rose by 0.16% (down by 0.14% unadjusted), following an increase of 0.51% (up by 0.21% unadjusted) in November. Seasonally-adjusted, the annualized rate of CPI-W inflation for the three months ended December was 4.12%, versus 4.18% for the three months ended November. The seasonally-adjusted annualized quarter-to-quarter inflation was 4.22% in the fourth-quarter versus 4.55% in the third.   

Year-to-year CPI-W inflation rose by 3.36% in December, following a 2.27% increase in November. The average CPI-W for 2009 versus 2008 showed a contraction of 0.67% compared with a 4.09% gain in 2008 versus 2007.

C-CPI-U.  Year-to-year or annual inflation for 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 — also was increasingly positive, rising by 2.76% in December, versus a 1.61% increase in November.  The average C-CPI-U for 2009 versus 2008 showed a preliminary contraction of 0.52% compared with a 3.37% gain in 2008 versus 2007.

Alternative Consumer Inflation Measures. Adjusted to pre-Clinton (1990) methodology, annual CPI growth rose to 6.1% in December, versus 5.1% in November, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to about 9.7% (9.68% for those using the extra digit) in December, versus 8.8% in November.

The average pre-Clinton (1990-base) inflation for 2009 versus 2008 was 3.0% compared with 7.2% in 2008 versus 2007. The average SGS-Alternate Consumer Inflation Measure (1980-base) showed inflation for 2009 versus 2008 at 7.0% compared with 11.6% in 2008 versus 2007.

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. 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 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.

Real Retail Sales.  Based on December CPI-U reporting, inflation- and seasonally-adjusted monthly December retail sales fell by 0.4%, where the current number was down by 0.3% before inflation adjustment, and where real retail sales rose by 1.4% in November against a 1.8% gain before inflation adjustment. Year-to-year, December real retail sales rose by 2.5%, versus a 5.4% annual gain, before inflation adjustment. November real retail sales rose by an annual 0.7%, versus a 2.5% gain before inflation adjustment. (See Commentary No. 271 as to serious seasonal factor distortions in current retail sales reporting.)

For the last 13 months, monthly real retail sales (CPI-U deflated) have been fluctuating around an average of $160.5 billion (the deflated December number was $162.3). Smoothed for monthly volatility on a six-month moving-average basis, as shown in the accompanying graph, the pattern of activity here has shifted to bottom-bouncing in terms of the level of inflation-adjusted sales.  Other than for some serious late-year seasonal factor distortions, there is no turnaround in economic activity — no recovery — evident here, just bottom-bouncing.

 

 

Monthly Industrial Production Jump Reflected Severe Weather Distortions.  The Federal Reserve reported that seasonally-adjusted December industrial production rose by 0.64% for the month, following a downwardly revised 0.58% (previously a 0.83%) gain in November.  The year-to-year contraction in December narrowed to 2.01%, from a revised 4.86% (was 5.08%) contraction in November. The June 2009 reading of 95.75 remains the record low for annual production growth since the shutdown of war-time production that followed World War II.  For the last 11 months, the production index has averaged 98.1, around which the series has been fluctuating, with the December’s six-month moving average reading at 98.9, versus 100.3 for the single month.

December’s reported monthly gain was due largely to weather distortions, not to bad seasonal factors. Despite the problems with the purchasing managers manufacturing production survey’s seasonal factors, which turned a negative December number positive, the Fed’s estimate of seasonal adjustments appeared to be reasonable. Due to the severe cold, however, utility usage surged by 5.9% for the month. Where a portion of manufacturing production is determined directly from surveyed electricity usage, the 0.1% contraction reported for manufacturing production accordingly was overstated. Such monthly distortions tend to balance out in subsequent monthly reporting.

 

The "recovery" in production is shown in the above graph, where month-to-month volatility is smoothed using a six-month moving average. Production activity has leveled off at a low-level plateau of activity that effectively has wiped out the last 10 years of growth in industrial production. Despite the near-term upside bump generated by short-lived stimulus impact and unusual weather, the series generally still is bottom-bouncing and should soften anew shortly.

 __________