January 2006 Edition
JOHN WILLIAMS' SHADOW GOVERNMENT STATISTICS
Issue Number 15
January 11, 2006
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2005's Mounting Economic and Inflation Woes Fueled Data Manipulation
Intensifying Inflationary Recession in 2006
Promises Financial-Market and Political Instabilities
Gold Should Thrive on 2006 Dollar Woes and Deteriorating Dual Deficits
As the administration hypes the economic boom shown in its manipulated data, less popularly followed numbers continue to show an inflationary recession. Further, thanks to the largely ignored and uncontrolled trade and budget deficits, the current downturn is at high risk of deepening into a hyperinflationary recession.
From the political side, the Clinton administration's polling experts determined that overstating economic activity could swing a close election. The Bush I administration tried the same concept but found it did not work. The American people have a fair sense of how they are doing, and George Bush (I) ended up appearing to be out of touch with reality. Bush II faces similar risks if the current manipulation continues. Over time, pocketbook issues have determined most national elections, and pocketbooks are near empty coming into 2006.
Nonetheless, with President Bush's current approval ratings doing some bottom bouncing after the hyped phony economic data, recent manipulative behavior likely has been reinforced and will continue.
Among the Big Three series, continued political jiggering was evident in the most recent jobs, GDP and inflation reporting, as discussed in the respective sections. There were several suspect payroll numbers, but the real jobs reporting test will come next month when a variety of factors suggest a weak jobs gain if not an outright payroll contraction. Politics promises a positive result. The GDP revision was not much more than statistical noise versus the prior month's politicized number. The CPI dropped sharply, overstating the decline in energy prices, as suggested last month. When energy prices rise, the CPI lags significantly in reflecting same.
In other reporting, while November retail sales and industrial production put in strong performances, annual growth in both series was marginal. Production, in particular, should weaken with the passing of Hurricane Katrina-related distortions. November housing starts and durable goods also were strong, the first with volatility not unusual to the series, the second dominated by massive but irregular aircraft orders. Both series are likely to soften meaningfully in the next round of reports.
The December purchasing managers new orders index declined for the third month, closing in again on the 50.0 mark that signals outright contraction. Consumer confidence was strong for the month, but still signaling recession year-to-year. Also on the downside, the most recent reporting of the trade deficit, jobless claims and money supply all reflected a contracting economy. The soon-to-disappear M3 money supply measure, however, continued to send out cautionary inflation signals.
The U.S. financial markets face ultimate doom thanks to both the federal budget and trade deficits that now are spiraling out of control. Mounting concerns have been one factor behind the ongoing strength in gold prices, while growing awareness of the insurmountable problems associated with these deficits offers downside risks to the markets in 2006.
As shown in the accompanying graph, the latest trade reports published by the Department of Commerce indicate rapid deficit deterioration, with successive monthly record levels of $66.0 billion and $68.9 billion set in September and October, with the October deficit annualizing to $827 billion. While the September and October data may include some distortions from Katrina impact, the basic patterns and conclusions tied to the explosive deficit growth will not change, despite any near-term reporting volatility.
The second graph shows both the accounting-gimmicked "official" and the generally accepted accounting principle or GAAP-based U.S. federal budget deficits as detailed in the December 2005 SGS Supplement (Re: FY2005 Treasury GAAP Accounting). Net of the one-time accounting charge for the setup of Medicare enhancements in 2004, the annual GAAP-based deficit has held close to $3.5 trillion for the last three fiscal years, with total federal liabilities now topping $50 trillion.
Deterioration in both the trade and budget deficits is beyond remedy with no chance or prospects of containment. Other than occasional gratuitous lip service, no one in the federal government is expressing serious concern for conditions that promise an eventual collapse in the value of the U.S. dollar, as part of a hyperinflationary depression.
On the trade front, active trade policies, designed to drive U.S. manufacturing offshore, promise ongoing trade deterioration. One area hard hit by trade problems has been what once was a U.S.-based auto industry. With talk abounding of the possible bankruptcy of General Motors, and with Ford rumored to be not too far behind, one has to wonder about the old promotional adage "What's good for General Motors is good for America." Indeed, the U.S. is facing a practical bankruptcy as well. As a rule of thumb in such matters, the louder and more frequent the denials of a bankruptcy, the closer such action usually is.
On the deficit front, the current annual $3.5 trillion shortfall in government operations is beyond remedy within the current political system. For example, if personal income taxes were raised to 100% -- that is if all personal income were seized by the government -- annual operations still would be in deficit.
With 2006 a mid-term election year, the democrats are going to blame the republicans for a bad economy and a rising federal deficit, but only the "official" deficit will be discussed. The halcyon days of Bill Clinton's phony jobs growth and budget surpluses also a sure bet to be recalled.
Both political parties, however, are responsible for the current financial crisis facing the United States, and neither party has a solution. There are no politically happy solutions, only some form of national bankruptcy or draconian reorganization of the government and society. Since today's politicians plan only with a forecast horizon that gets them to the next election, no one will address the looming crisis until after it breaks. Any interim problems ranging from natural or man-made catastrophes to a bankrupt pension system will be met by added deficit spending, so long as the markets will sustain same.
When the ultimate financial crisis will break remains the key question. A continuation of another five years or more of current political shenanigans is possible, but so is a rapid unwinding of the current perceived stability. Key areas to watch in 2006 will be the value of the U.S. dollar and gold. Gold already is beginning to reflect the instabilities in the system. The dollar could break at any time.
The dollar's strong performance in 2005 remained closely tied to strong foreign holdings of the greenback that ended up supporting the U.S. credit and equity markets. With increased rumblings among foreign central banks about their heavy dollar holdings, a marked shift in this area looks like a fair bet in 2006. No one wants to hold what will become the worthless paper of a bankrupt entity, and current central bank holdings usually have occurred under some form of political duress. Central banks recognize the perils of the U.S. financial condition; even the lame-duck U.S. central banker has started to talk about it. Heavy dollar dumping is just a matter of when, not if. It is better to be the first to exit the dollar than the last.
A direct result of heavy dollar selling would be a spike in U.S. interest rates and heavy equity selling. Once the exit from the U.S. currency starts, it would not take much for the rest of the U.S. financial-stability myth to begin unraveling.
In general, the broad economic outlook has not changed. The 2005 to 2007 inflationary recession continues to deepen. Recession, inflation and risks of heavy dollar selling are upon us and continue to offer a nightmarish environment for the Pollyannaish financial markets.
The Shadow Government Statistics' Early Warning System (EWS) was activated in May and signaled the onset of a formal recession early in July 2005. The EWS looks at historical growth patterns of key leading economic indicators in advance of major economic booms and busts and sets growth trigger points that generate warnings of major upturns or downturns when predetermined growth limits are breached. Since the beginning of 2005 a number of key indicators have been nearing or at their fail-safe points, with four indicators moving beyond those levels, signaling a recession. Once beyond their fail-safe points, these indicators have never sent out false alarms, either for an economic boom or bust.
Negative GDP growth is not likely to surface in regular government reporting until after the November election, given the rampant political manipulation of the GDP, employment and CPI. The National Bureau of Economic Research (NBER) should time the downturn to mid-2005 and announce same also sometime after the election, so as not to be deemed politically motivated in its timing.
Whether or not there is a recession will be a hot topic in the popular financial media early in 2006, with politics helping to fuel the debate as the year progresses. Those Wall Street economists who act as shills for the market will keep up their "strong growth is just around the corner" hype regardless of any and all evidence to the contrary.
From the standpoint of common experience, this downturn will be considered the second leg of a double-dip recession, not an independent contraction as will be claimed officially.
Most economic data have softened, and the trend will accelerate sharply, with regular monthly contractions seen for both payroll employment and industrial production, although political manipulation can keep the payroll data afloat for a while longer. Significant deterioration also will be seen in corporate profits and federal tax receipts. Lower tax receipts will combine with disaster recovery spending and the ongoing war in Iraq to accelerate deterioration in the federal deficit.
This outlook is predicated on economic activity that already has taken place and does not consider any risks from exogenous factors such as renewed terrorist activity in the United States, major natural disasters or a financial panic.
Market perceptions of the downturn in business activity are mixed. When expectations begin to anticipate weak data, expectations also will be lowered for inflation, although stagflation still seems to have gained a foothold in some consensus thinking. Consensus forecasts generally will tend to be surprised on the downside for economic reports and on the upside for inflation reports, for some time to come.
The roots of the current difficulties are structural in nature. A consumer starved of income growth and overburdened with debt cannot sustain the real (inflation-adjusted) growth in consumption needed to keep GDP growth in positive territory. The income weakness is a direct result of the loss of a significant manufacturing base to offshore locations and the ensuing explosive, perpetual growth of the U.S. trade deficit.
Exacerbating economic and financial woes will be unusually high inflation during this contraction. Inflation, fueled by high oil prices, weakness in the U.S. dollar and accelerating Fed monetization of federal debt, will not be brought under control simply by weakness in economic demand. Instead, persistently high prices only will serve to intensify the 2005 to 2007 recession, making it exceptionally long and protracted. Ongoing inflation woes and dollar problems will maintain upside pressure on long-term interest rates, inhibiting the traditional flattening of the yield curve expected with a recession.
Risks of the current circumstance evolving into a hyperinflationary depression remain extraordinarily high.
The unfolding inflationary recession is the worst of all worlds for the financial markets. Particularly hard hit will be the U.S. dollar, with downside implications for both equity and bond prices.
(Each of these series is explored in the background article "A Primer On Government Economic Reports," available on the home page.)
As discussed in this month's opening comments, heavy political manipulation of the big three market movers continues. The boom-time results of these popularly followed numbers are the focus of a propaganda blitz that has helped to boost the President's approval rating coming into the mid-term election year. Accordingly, reported results will have less than usual relevance to actual underlying activity, and upcoming reporting will be more determined by political need than the economic factors that sometimes drive results.
Employment/Unemployment -- Although December payroll gains were less than expected, prior month revisions were more than offsetting to the upside, and unemployment notched lower in response to the evolving Bush economic miracle. The Bureau of Labor Statistics traditionally has trouble getting the holiday seasonal factors correct, and they missed again 2005. The data also were hobbled by ongoing Katrina-related reporting problems.
The popularly followed seasonally-adjusted unemployment rate U-3 for December eased to 4.91% from November's 5.05%, with the monthly change holding within the published +/- 0.2% error margin. Unadjusted U-3 unemployment eased to 4.6% in December from November's 4.8%, while the broader U-6 unemployment measure held for the second month at 8.4% in December. December's seasonally-adjusted U-6 rate, however eased to 8.6% against November's 8.7%. Including the long-term "discouraged workers" defined away during the Clinton administration, total unemployment remains roughly 12-percent.
For December, the household survey showed a seasonally-adjusted gain of 168,000 following November's revised decline of 14,000 (was 52,000) in household employment (the number of people with at least one job). Revised seasonal factors reduced the employment loss. Also with the seasonal-adjustment revisions, the unemployment rate revised 0.1% lower for three months (March, April and October), with an astounding zero months revising upward. Thank goodness for carefully managed rounding.
In line with the household survey, December payrolls showed a seasonally-adjusted gain of 108,000 (179,000 net of revisions), which fortunately was at the cusp of the published 90% confidence interval of +/- 108,000, following November's gain of 305,000 (was 215,000). Annual growth in unadjusted December payrolls was 1.50%, slightly lower than Novembers 1.54% (previously reported at 1.47%).
December's payroll gain of 108,000 included an upward bias of 53,000 jobs from the "net birth/death" adjustment to potential reporting entities, a level down from the prior year's 66,000 upside bias. There also were some suspect numbers, with the unadjusted November payroll number revising upwards by exactly 100,000, or the unadjusted December employment level coming in at just 1,000 above the 2,000,000 annual jobs gain being touted currently by the administration.
The latest report was against a background of higher November and October help-wanted advertising, mixed employment trends as reported in the various December purchasing managers surveys, and continued monthly deterioration in new claims for unemployment insurance (see the respective sections).
Next Release (February 3): Despite a variety of factors suggesting a very weak January 2006 report, or possibly an outright jobs contraction, the political situation should keep things happily on the plus side. The first hit to the data is the benchmark revision, which will subtract 203,000 (upped from 191,000) overstated jobs from March 2005, with revisions up to present and back for five years. Such a change usually would mean somewhat slower monthly growth. Second, the annual bias factors will take a large negative swing in January 2006 (minus 280,000 in January 2005), after a positive 53,000 bias in December 2005. In recent years, the seasonally adjusted January data have been depressed by that bias factor. That distortion would not happen if the data were properly adjusted.
Of particular interest will be how the BLS handles Katrina-period employment in benchmark revision. The jobs gains currently shown for that time clearly are overstated.
In reality, jobs should be flat to contracting at present, but look for 200,000 plus jobs growth in February and beyond. This is part of an unfolding attempt at creating a statistical economic "miracle" for the Bush II administration, coming into the mid-term election year, much as Bush I tried coming into the 1982 election. For an extended period during the resulting Clinton Era, reported jobs growth was targeted at precisely 250,000 jobs per month, three million jobs per year.
Gross Domestic Product (GDP) -- The "final" estimate revision of annualized inflation-adjusted growth for third-quarter GDP held at 4.14%, with slight offsets in higher nominal growth and higher GDP inflation. The revision effectively was little more than statistical noise versus the "preliminary" 4.28%, which had been up from the "advance" 3.80% reporting, and up from 3.31% reported in the second quarter. Annual growth revised to 3.64% from 3.67%, up slightly from 3.59% in the second quarter. These numbers continue as political propaganda and have little or no relationship to underlying economic reality. Given the combination of long-term upside methodological biases built into the GDP and deflation issues discussed last month, an actual quarterly contraction of one-percent in third-quarter GDP would have been credible.
Final estimates of alternate GDP measures Gross National Product (GNP) and Gross Domestic Income (GDI) also were published with this report, showing respective annualized quarterly real growth rates of 4.41% (was 4.35%) versus 3.16% in the second quarter, and 4.58% (was 4.52%) versus 2.03% in the second quarter. GNP is the broadest economic measure, incorporating GDP and the trade balance in factor income (interest and dividend payments). GDI is the income-side equivalent (in theory) of the consumption-side GDP.
Next Release (January 27): The "advance" estimate for fourth-quarter GDP is likely to be reported in line with third-quarter growth, despite a rapidly expanding trade deficit and the 2.9% annualized real growth now suggested by the administration's recently revised annual GDP forecast (see last month's opening comments). Where a quarterly contraction would be appropriate, politics will keep growth estimates in line with perceived mid-term election needs.
Consumer Price Index (CPI) -- Reflecting November's decline in gasoline prices and the BLS's tendency to over-report near-term declines in energy prices, the seasonally-adjusted October CPI-U dropped by 0.6% (0.8% unadjusted), following October's 0.2% (0.2% unadjusted) gain. November's annual inflation eased to 3.46% following October's 4.35%.
The "experimental" Chained Consumer Price Index (C-CPI-U), the fully substitution based CPI that presumably is the eventual replacement for current CPI reporting, showed annual inflation of 2.79% in November, following October's 3.32%.
Adjusted to pre-Clinton methodology, annual CPI growth would be about 6.3% as of November, while the SGS Standard CPI, net of all the methodology changes of the last 30 years that were designed to suppress inflation reporting, stood at 7.2%.
Contrasted with the 2.1% annual Core CPI-U inflation rate that excludes the necessities of food and energy as measured in both November and October, the SGS Base CPI-U that includes only the necessities was up 3.6% versus 4.7% in October. The SGS rate, however, still suffers the standard CPI-U methodological understatement.
Next Release (January 18): The December CPI and other inflation reports generally should surprise soft consensus forecasts on the upside, with "core" inflation increasingly reflecting the effects of higher energy prices.
Despite occasional one-month swings, annual inflation will remain high and should begin to accelerate to the upside as 2006 progresses. With seasonally-adjusted monthly inflation reported at 0.0% for December 2004, monthly December 2005 inflation above or below that will move the reported annual inflation rate in tandem.
To varying degrees, most of the following series have significant reporting problems. All series (including the more trouble free) will be addressed in a monthly "Reporting Focus," with this month's analysis surveying the availability and quality of help-wanted advertising surveys.
In addition to the "big three," other series that have been detailed are:
* The Federal Deficit (an original background article, update in the Alert of July 7, 2005, update in Supplement to December 2005 SGS);
* Consumer Confidence (November 2004 SGS);
* The Trade Balance (December 2004 SGS);
* Industrial Production (January 2005 SGS);
* Initial Claims for Unemployment Insurance (February 2005 SGS);
* Retail Sales (March 2005 SGS);
* Alternate Payroll Employment Measures (April 2005 SGS);
* Money Supply (Part I / SGS Early Warning System - May 2005 SGS, Part II -
June 2005 SGS, M3 update November 2005 Supplement);
* Financial- and Trade-Weighted U.S. Dollar Indices (July 2005 SGS);
* Short-Term Credit Measures (August 2005 SGS);
* Income Variance/Dispersion (September 2005 SGS);
* CPI (an original background article and October 2005 SGS).
Federal Deficit -- The official, accounting-gimmicked 2005 deficit (fiscal year ended September 30th) was $318.5 billion, but it was eleven times higher -- at $3.5 trillion -- on a GAAP basis, per the U.S. Treasury (see the opening comments and the December 2005 SGS Supplement). The official, accounting-gimmicked deficit for 2004 was $412.8 billion.
As of November 2005, the second month in fiscal 2006, the twelve-month rolling accounting-gimmicked deficit widened to $333.6 billion, from $308.4 billion in October, against $414.9 billion in November 2004.
Separate from the GAAP-based numbers and official deficit reporting, the change in gross federal debt is a fair indicator of actual net cash outlays by the government. As of September 30, 2005, the gross federal debt was $7.933 trillion, up $554 billion from September 2004, which, in turn, was up by $596 billion from September 2003.
The gross federal debt as of November 30th was $8.092 trillion, up $567 billion from November 2004, which, in turn, was up $599 billion from November 2003. For December 2005, gross debt was $8.170 trillion, up $574 billion from December 2004, which in turn was up $595 billion from December 2003.
Going forward, the official federal deficit will be inflated quickly by billions allocated to disaster reconstruction and to the ongoing war in Iraq. Government finances also will suffer tax revenue losses from the intensifying recession. While GDP growth estimates can be gimmicked, incoming tax receipts will remain an independent estimate of underlying economic reality.
Initial Claims for Unemployment Insurance -- Annual growth in initial claims continued to pick up (an economic negative), even with the spike from the severe hurricane season passing out of the 17-week moving average. On a smoothed basis for the 17 weeks ended December 31st, annual growth rose to 2.9% from the 2.6% gain seen change in the 17 weeks ended November 26th. The highly publicized drop in jobless claims to a five-year low for the December 31st week was no more than bad seasonal factors out of the Department of Labor for the Christmas to New Year period. Weekly claims, accordingly, will show a "surprising" surge in the next two weeks. Current weekly levels generally should continue running above a year ago, confirming a recession.
The volatility of the seasonally-adjusted weekly numbers is due partially to the seasonal-adjustment process. When the series is viewed in terms of the year-to-year change in the 17-week (three-month) moving average, however, such is a fair indicator of current economic activity.
Real Average Weekly Earnings -- November's real earnings rose by 0.6% following October's gained of 0.5% (was 0.4%), thanks to the sharp drop in November CPI. November's real earnings still fell 0.4% from the year before, after October's 1.5% (was 1.6%) decline.
Volatility in this series comes primarily from variations in reported CPI growth. Allowing for the biases built into the CPI-W series used to deflate the weekly earnings, annual change in this series signals continuing recession.
Retail Sales -- November's seasonally-adjusted monthly retail sales rose by 0.3% (0.7% net of revisions) +/- 0.7% after October's 0.3% gain (was a decline of 0.1%).
Inflation-adjusted year-to-year growth in retail sales below 1.8% (using the official CPI-U for deflation) signals recession. November's annual growth on that basis was 2.8%, up from October's 1.7% (was 1.5%).
Next Release (January 13): December retail sales should come in below strong expectations, reflecting impaired economic activity and anecdotal evidence of a lackluster holiday sales season.
Industrial Production -- Seasonally-adjusted November production rose by 0.7% (1.0 net of revisions), after October's 1.3% gain, which had been reported previously at 0.9%. The November gain was attributed largely to continued Gulf Coast recovery, while the unusually large October revision was attributed to production of air conditioners and manufactured homes. Year-to-year growth generally has slowed since the December 2004 near-term peak of 4.4%, with November annual growth at 2.8% versus 2.2% (was 1.9%) in October.
Next Release (January 17): Industrial production increasingly will mirror the recession, entering a series of regular monthly contractions, now that the Gulf Coast distortions largely have run their course. Upcoming reports will tend to surprise market expectations on the downside.
New Orders for Durable Goods -- Seasonally-adjusted new orders for durable goods rose by 4.4% (4.0% net of revisions), following October's 3.0% increase (was 3.4%). Nearly all of the increased orders volume in the last two months has been tied to aircraft, a commodity with irregular spikes in orders, which usually are for long-term delivery, and where order cancellations or delays often go unreported. Year-to-year growth in November orders was 12.1% after October's 11.3% gain. The widely followed nondefense capital goods orders surged by 19.6% after October's 6.7% gain, again reflecting aircraft orders.
Durable goods orders once was one of the better leading indicators of broad economic activity, when smoothed using a three-month moving average. After the semi-conductor industry stopped reporting new orders, however, the series' predictive ability suffered a serious setback.
Trade Balance -- The seasonally-adjusted October deficit in goods and services soared to a new monthly record of $68.9 billion, from $66.0 billion in September (previously $66.1 billion) and as further discussed in the opening comments. It still is not clear how much these numbers have been affected by data-flow disruptions or trade disruptions related to the hurricanes. Such should be cleared up shortly.
Next Release (January 12): The November trade deficit could show some rebound if the recent extraordinary deterioration has in any way been exacerbated by Katrina's effects. Otherwise, upcoming deficits will continue to surge beyond consensus forecasts, with new record monthly deficits following in the months ahead.
Consumer Confidence -- December Consumer confidence enjoyed its usual holiday season rebound, with annual growth, however, still lingering in recession territory. The Conference Board's consumer confidence index gained 5.4% after November's 15.4% jump, while the University of Michigan's consumer sentiment measure rose 12.1% following November's 10.0% gain.
On a three-month moving-average basis, the Conference Board and University of Michigan December 2005 readings showed respective annual contractions of 0.4% and 12.5%, against November's contractions of 4.0% and 17.6%. These lagging, not leading, indicators are signaling that the economy remains in recession.
Short-Term Credit Measures -- Annual growth in short-term credit measures for businesses remained strong, holding in double digits, while annual growth in consumer credit continued to slow, now at three percent.
Seasonally-adjusted consumer credit contracted by 0.39% in October and by 0.03% in November, with annual growth slipping and holding at 3.0%, down from 4.2% in September. Without growth in income, growth in personal consumption can be supported short-term only by debt expansion or savings liquidation, and debt expansion is slowing.
Annual growth in commercial paper outstanding eased to 18.6% in December from 19.7% in November. Annual growth in commercial and industrial loans was 12.9 in November, following October's downwardly revised 13.1%. Rising sales can fuel short-credit needs, but so too can slowing sales, slowing collections and rising inventories.
Producer Price Index (PPI) -- The seasonally-adjusted November finished goods PPI fell by 0.7% (down 1.6% unadjusted), following October's 0.7% monthly gain. November's 4.4% annual inflation rate softened from October's 5.9%, with both monthly and annual inflation rates heavily impacted by declining energy prices.
Next Release (January 13): Despite a large component of random volatility in monthly price variations, PPI inflation reporting over the next several months should, in tandem with the CPI, top market expectations. Inflation should be worse than consensus forecasts increasingly in the "core" inflation measures. The last downswing in oil prices should be fully worked out of the reporting with the December numbers.
Purchasing Managers Survey (Non-Manufacturing) -- Published by the Institute for Supply Management (ISM), there is nothing unusually wrong with this survey of the service industry, except it does not have much meaning. Unlike its older counterpart, the manufacturing survey, if service companies such as law firms, hospitals or fast-food restaurants have "increased orders," that does not necessarily mean that economic activity is increasing.
The overall December index rose by 2.2% to a level of 59.8, following November's 2.5% decline to 58.5. The index is a diffusion index, where a reading above 50.0 indicates a growing service economy, in theory. Both the employment and prices paid components, however, have some meaning.
The December employment component notched higher to 57.1 from November's 57.0, suggesting a slight employment pickup in the service sector.
The prices paid component diffusion index is a general indicator of inflationary pressures. The December index eased further by 6.3% to 69.5 from November's 74.2. The December reading, however, still remains highly inflationary, and, on a three-month moving average basis, the annual change in December was a gain of 0.4%, falling back from November's 8.1%.
The following numbers are generally good-quality leading indicators of economic activity and inflation that offer an alternative to the politically-hyped numbers when the economy really is not so perfect. In some instances, using a three-month moving average improves the quality of the economic signal and is so noted in the text.
Economic Indicators
Purchasing Managers Survey (Manufacturing) - New Orders -- The December new orders index declined the for the third consecutive month, dropping 7.2% to 55.5 after November's decline of 3.1% to 59.8. The measure breached its fail-safe point a number of months back, generating an SGS early warning indicator of pending recession.
The Commerce Department provides suspect seasonal factors for this series, and adjusted monthly numbers often can be misleading in the reporting of month-to-month change. This problem is overcome by using year-to-year change on a three-month moving average basis. On that basis, the December index fell by 3.1% following November's index 3.0% increase. The index gradually has notched lower from its peak annual growth of 36.6% in April of 2004, but then showed something of an uptrend that lasted several months.
Published by the Institute for Supply Management (ISM), the new orders component of the purchasing managers survey is a particularly valuable indicator of economic activity. The index is a diffusion index, where a reading above 50.0 indicates rising new orders. The overall December ISM index softened again, falling to 54.2 from November's 58.1. An index level of 50.0 divides a growing versus contracting manufacturing sector. The December employment component fell to 52.7 from 56.6.
Help Wanted Advertising Index (HWA) -- SGS resumes its regular analysis of help-wanted advertising, as discussed in this month's "Reporting Focus." The November index increased a point to 39.0 from October's 38.0 reading, up 5.5% annually on a three-month moving-average basis. At best, the series has continued to bottom bounce since the onset of the last recession.
Housing Starts -- November housing starts rebounded 5.3% after October's 6.6% (5.6%) decline. Year-to-year, November starts were up 17.5%. On a three-month moving average basis annual growth rose to 9.0%, up from October's 4.3%, pulling back temporarily from the brink of generating a recession warning signal.
Money Supply -- Annual money supply growth has shown solid indications of recession for months, but the acceleration in both real and nominal M3 growth has moved that indicator into neutral territory. Nonetheless, the recession signal was generated, and it always has been followed by a major downturn. Movement into neutral territory does not signal an economic upturn, as positive real growth in M3 does not regularly translate into positive economic growth. It often, however, is a harbinger of rising inflation. From the standpoint of inflation worries, the Fed is "lucky" in its timing of discontinuing M3 reporting in two months.
At the level of the next broadest money supply measure, M2, nominal and real growth continue to soften, signaling an intensifying recession.
Before inflation adjustment, M1, M2 and M3 monthly changes for December (preliminary estimate based on four weeks of data) versus November were down 0.2%, up 0.5% and 0.7%, versus up 0.4%, 0.4% and 0.4% respectively. Year-to-year rates of change in seasonally-adjusted December and November M1, M2 and M3, respectively, were down 0.3%, up 4.0% and 7.7%, and down 0.2%, up 3.9% and up 7.4%.
Adjusted for CPI inflation, December's M1, M2 and M3 annual year-to-year rates of change were down 3.8%, up 0.3%, and up 3.9%, respectively, versus down 3.6%, up 0.4% and up 3.8% in November. On a three-month moving-average basis, the December annual rates of change were down 3.7%, up 0.1% and up 3.5%, levels, except for M3, that remain well underwater using the old-style CPI.
Inflation Indicators
Purchasing Managers Survey (Manufacturing) - Prices Paid -- The December prices paid diffusion index remained strong, though it was down 14.9% from November to 63.0, following November's 11.9% decline. The current level signals an ongoing inflation problem. On a three-month moving average basis, December's year-to-year change dipped into negative territory, down 1.6%, after November's 3.3% increase.
Published by the Institute for Supply Management (ISM), the prices paid component of the purchasing managers survey is a reliable leading indicator of inflation activity. The measure is a diffusion index, where a reading above 50.0 indicates rising inflation.
Oil Prices -- West Texas Intermediate Spot (St. Louis Fed) resumed its upturn in December, averaging $59.43 per barrel, up 1.9% from November's $58.30. Oil prices have continued to rise in early January trading and remain at highly inflationary levels, with December's average price up 37.2% from December 2004 versus November's 20.3% gain. These swings will be reflected shortly in the purchasing managers surveys.
Spot prices have and will continue to gyrate. Despite ongoing near-term price volatility, high oil prices will continue as a major contributing factor to the inflation side of the current inflationary recession. Oil price changes permeate costs throughout the economy, ranging from transportation and energy costs, to material costs in the plastics, pharmaceutical, fertilizer, chemical industries, etc. Anecdotal evidence remains strong that cost pressures have already passed into the so-called "core" inflation sectors.
Oil price volatility affects CPI reporting. Downside oil price movements tend to be picked up more quickly and fully by the BLS in its inflation measures than are upside movements. For example, November's recent plunge in gasoline prices showed up more fully and quickly in the CPI than did the prior surge in oil prices. Even as currently understated, CPI and PPI inflation should be much stronger than commonly predicted for the next six-to-nine months, partially as a result of continued high oil prices.
U.S. Dollar -- The Shadow Government Statistics' Financial-Weighted U.S. Dollar Index is based on dollar exchange rates weighted for respective global currency trading volumes. December's monthly dollar average declined by 0.7% following November's 2.1% gain (erroneously reported previously at 4.9%). Despite the November miscalculation, the basics of last month's dollar analysis remain unchanged. December's year-to-year change rose to 9.7%, the strongest showing since 2001, after November's annual gain of 8.4% (previously 11.4%).
Reflecting its stronger weighting of the Canadian dollar, December's monthly average of the Federal Reserve's Major Currency Trade-Weighted U.S. Dollar Index fell by 0.9%, after November's 1.7% gain. December's rate of annual change also rose to 7.1% from October's 6.9%.
The dollar's movement to the downside has intensified in early January trading. The relative strength in the financial- versus trade-weighted dollar remains at a level that usually precedes a dollar sell-off.
Underlying fundamentals remain extraordinarily negative for the greenback. With serious shocks still looming in U.S. economic and fiscal data, heavy selling pressure against the U.S. currency could break at any time, with little warning. New record lows for the dollar still remain likely in the months ahead, despite any overt or covert supportive intervention by any central bank(s).
Generally, the weaker the dollar, the greater will be the ultimate inflation pressure and the eventual liquidity squeeze in the U.S. capital markets.
Help-wanted advertising historically has been a reliable indicator of underlying business conditions and pending employment activity. Surveyed each month by the Conference Board, the index is based on the number of job offerings appearing in 51 (at present) newspapers around the country. The data are not seasonally adjusted and have been published from January 1951 on. Given the lack of seasonal adjustment, SGS has found the series most useful when smoothed using a three-month moving average and viewed in terms of year-to year change.
As seen in recent activity, the index hit a trough of 35 in the last recession, in May 2003, the lowest level then reported since September 1961. The index has been bottom bouncing in the interim, hitting 39 in November 2005 reporting.
SGS has used this measure as a reliable leading indicator of major changes in the direction of economic activity, but apparent recent reporting difficulties at the Conference Board raised issues of ongoing reliability of the traditional series, with monthly revisions swinging by ten percent of the total index value. Separately, where the traditional help-wanted advertising measure counts advertisements in newspapers, new measures of the growing on-line Internet help-wanted advertising also have been created. Accordingly, the nature and quality of the help-wanted advertising indicator has been reexamined and the new measures considered.
First, as to the traditional series' reporting quality, the huge variations and revisions, seen in particular in the August 2005 index, were due to data gathering problems created by Hurricane Katrina. Such is according to the Conference Board. Since the data series appears largely to have stabilized, we have resumed using it as before. There is no viable alternative to the measure, despite some still irregular revisions to the series.
Second, as to the Internet indicators that attempt to measure the level of help-wanted advertising in the electronic medium, there are two indices that are gaining some following. The Monster Employment Index (www.monsterworldwide.com) was started in April 2004 with data gathered since October 2003. Its electronic surveying counts job postings at over 1,500 Web sites on a monthly basis.
The other Internet measure is the Conference Board's Help-Wanted Online Data Series started in July 2005. The Conference Board measure surveys 1,200 Internet job boards and counts only those ads that are unduplicated, first-time postings.
The Internet clearly is a major and growing market for help-wanted advertising and job searches. Accordingly, the electronic ads likely have had a hand in reducing print ads counted in the traditional help-wanted index. Still, there are major issues tied to the lack of history behind the new series that only can be cured by the passage of time. Since neither the Monster nor Conference Board series is seasonally adjusted, year-to-year growth will be the primary method of assessing the results, and the Conference Board numbers have not been around long enough to generate the first annual growth measure.
Compared on a monthly basis, there seems to be little relationship between the two indicators, so far. For example, the Conference Board measure showed a monthly decline in November of 9.2%, where the Monster measure gained 4.2%.
The Monster measure has been around long enough, however, to start generating year-to-year change rates, which seem to be averaging around twenty-seven percent annual growth. One has to wonder how much that reflects growth in the use of the Internet medium and the medium itself, versus consistent ad volume. The annual growth rate did dip in September at the time of Katrina, but otherwise has remained stable near the twenty-seven percent level.
SGS will continue following and assessing the new series, but they are too new to be generating meaningful indications of employment activity. The older help-wanted series still is the primary indicator of such activity, despite any weaknesses and likely will remain so for another year or two.
The monthly Purchasing Managers Surveys, particularly the manufacturing survey, published by the Institute for Supply Management, provide a view of economic activity that largely is free of federal government involvement. How the indices are constructed and the stories that can be told by the various sub-indices will be explored.
This still-pending supplement should be published in the next two weeks. It will complete the introduction of SGS's alternative CPI measure, the SGS Standard CPI, including the formal reporting methodology, first reporting results and a reconstructed historical data base that will link back to pre-Jimmy Carter official CPI reporting. The release date will be announced shortly.
February's Shadow Government Statistics is scheduled for release on Wednesday, February 8, 2006. The monthly newsletter regularly is scheduled for posting on the Wednesday following the Friday release of the employment statistics. The posting of the next SGS on the website, as well as any supplements or interim alerts, will be advised immediately by e-mail.