Flash Update
Flash Update
October 16, 2006
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Observations on Trade, Budget and Retail Sales Data -- Un-hyped
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Give Wall Street a bad number, and a positive spin will be generated. Contrary to the popular financial-media hype last week, the news on the trade deficit, the budget deficit and retail sales could not have been much worse. If you like the "core inflation concept," you will love the "core trade deficit" and "core retail sales."
TRADE DEFICIT. The seasonally-adjusted August 2006 trade deficit widened to a new monthly record of $69.9 billion from the prior record of $68.0 billion just the month before, in July. Once again, the excuse was the deteriorating deficit was just due to rising oil prices. Once again, such claims were terribly misleading. In July, a reduction in dollar oil imports actually dampened the exploding deficit.
For August, the $1.9 billion deficit increase could be attributed fully to oil, but not to oil prices. Higher oil prices accounted for $0.4 billion of imports, while the increase in the physical volume of oil imports accounted for $1.5 billion of imports.
August oil imports (both physical and dollar volume) rose to the highest level, ever. The United States is a month or two (post-election) from re-escalating Middle Eastern tensions, with the economy more heavily dependent on foreign oil than at any time in the past.
Even if Wall Street is going to start touting a "core" trade deficit, net of energy, the news here is dismal for the U.S. dollar, inflation, the markets and for third-quarter GDP. It is a big plus for gold.
In the days when underlying economic activity drove GDP reporting, such explosive trade deficit increase in the first two months of a quarter would topple the pending "advance" estimate of quarterly GDP growth. While the current circumstance suggests a softer initial estimate of third-quarter GDP at the end of this month, the statistical release comes out the week before the election.
BUDGET DEFICIT. The Bush Administration is basking in the news of a fiscal-year 2006 federal budget deficit of $247.7 billion, down $71.0 billion from 2005's $318.7 billion. The improvement was due to corporate tax relief on repatriated profits, which triggered heavy activity and a resulting short-lived surge in corporate tax revenues. The tax surge had nothing to do with economic activity.
Putting the Administration's good news in perspective, gross federal debt closed out fiscal 2006 at $8.507 trillion, up by $574 billion from 2005, which in turn was up $554 billion from 2004. Despite the gimmicked reporting, the amount of debt taken on showed worsening annual fiscal deterioration. Reporting based on generally accepted accounting principles (GAAP) -- due for release in about two months -- also should show deterioration, with the actual 2006 deficit in excess of $3.5 trillion.
RETAIL SALES. September retail sales fell by 0.4% from August, but such was sold as good news, because the decline in gasoline sales more than accounted for the drop. Here, again, the "core" concept has been extended to retail sales. Of course, Wall Street was not denigrating retail sales when surging sales were being lifted by rising gasoline sales in prior months.
The news shows a continuing rapid decline in economic activity. The problem is two-fold. First, total monthly retail sales declined and even may be down after inflation-adjustment. Second, year-to-year change dropped to 5.5% in September from 6.4% in August.
Keep in mind that September's annual growth is against last year's economic devastation of Hurricane Katrina! Like the unbelievable numbers shown in the September payroll report, retail sales growth should have shown a relative spike against last year, if the economy were experiencing anything close to normal economic growth.
CAUTION. The economy is showing unusually negative economic activity that may force recession recognition much sooner that the Administration would like (still not before the election). The September CPI should drop quite sharply, both month-to-month and year-to-year, due to declining gasoline prices and the year-ago seasonal effects from, and annual comparisons with, Katrina's distortions. Those numbers will start reversing next month.
Further details on all of the preceding will follow in the regular October SGS.
October's "Shadow Government Statistics" is scheduled for release on Wednesday, October 25, 2006. The posting of the next SGS, as well as any Interim Updates or Alerts, will be advised immediately by e-mail.