Flash Update
Flash Update
November 20, 2006
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Exaggerated Gas Price Drop Pushes Inflation Reporting to Nadir
M3 Growth Hits Four-Year High
Economic Activity Continues to Crumble
Post-Election Environment Set for Rebounding Inflation and Deepening Recession
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With the full newsletter due in a week, this will be a brief update touching upon some of the more significant reporting of the last two weeks. The Alternate Data pages for the CPI and continuing M3 have been updated for the October numbers. Best wishes to all for a Happy Thanksgiving! -- John Williams
The inflationary recession is picking up momentum. The various special factors that have depressed near-term inflation reporting have run their course, while economic data ranging from retail sales to housing continue to signal plummeting economic activity. Such is not a happy environment for the traditional financial markets.
With average monthly gasoline prices down 12.5% from a year ago, per retail sales reporting, the 18.3% annual decline in gasoline prices reported in the October CPI seems a little overdone, overstating the CPI decline by 0.24%. Such, however, has been a consistent reporting bias over time. Rising energy prices are slow to be picked up in CPI reporting and rarely are fully accounted for, while falling energy prices tend to be picked up immediately and often go beyond what has happened.
The seasonally-adjusted monthly October CPI-U was reported down 0.5% for the second month, with annual growth dropping to 1.3% from 2.1% in September, adjusted back to pre-Clinton methodology, annual inflation dropped to 4.7% and the SGS alternate measure of consumer prices (early 1980s methodology) eased to 8.9% from 9.4%.
Highly unusual again was the Chained-CPI-U -- published by the Bureau of Labor Statistics (BLS) as the probable substitution-based index for the geometrically-weighted and gimmicked CPI-U -- outpacing the CPI-U. From August through October, annual CPI-U inflation has dropped from 3.8% to 2.1% to 1.3%, while annual C-CPI-U inflation has declined from 3.4% to 2.2% to 1.6% and now shows higher inflation than the currently official series. Distortions from geometric weighting are skewing the inflation reporting.
Unless the BLS can come up with a monthly CPI drop in excess of 0.7% in November, the Katrina-distorted plunge in annual CPI and the effects of dropping gasoline prices have run their course. Last year, November CPI dropped by 0.7%. Any monthly change in November 2006 that is more positive than that will push the annual CPI rate higher by a like amount. The rebound in inflation reporting starts with the next monthly report.
Beyond threats from oil prices and U.S. dollar weakness, increasing growth in the broad money supply should become a hot topic, fueling inflation speculation in the financial markets, irrespective of Mr. Bernanke's protestations to the contrary. While the Fed no longer publishes M3 growth, our continuing M3 measure showed annual growth in October of 9.6%, up from 9.2% in September, and at its highest level since March 2002. Also, the gimmicked 2007 fiscal deficit started off with a widening deficit in October.
The election went against the Republicans, and the problems were much more than the hyped hysteria surrounding the Iraq War. Among other issues, the economy is tanking and Main Street U.S.A. can see it. Seasonally-adjusted October retail sales dropped again, down 0.2%, following September's revised 0.8% plunge, which also was more than the reported monthly inflation decline. Seasonally-adjusted October housing starts fell 14.6% for the month and were down 27.4% from the year before. More importantly, the annual decline in the three-month moving average fell to 22.2%, its lowest level since the depths of the 1990/1991 recession.
The September trade deficit, however, showed an unusually sharp narrowing, one that should help the "preliminary"-estimate revision to third-quarter GDP. The seasonally-adjusted trade deficit narrowed to $64.3 billion from $69.0 billion in August. While the "improvement" could be explained by the reported decline in oil imports -- half tied to price, half tied to volume -- this is one of those numbers that has a terrible odor to it. There were unusual carry-over revisions (related to paperwork flow through the Customs Service), as well as possible seasonal-factor distortions from last-year's Katrina effects on the Port of New Orleans. Regardless, the deficit will rebound sharply in the months ahead, setting new records.
Then, there are those dropping oil prices. As with the CPI, the trade numbers suddenly seem to be anticipating price cuts that have not taken place yet. This intensifying quirk in economic reporting with be explored in depth in the upcoming newsletter.
Any markets that read the current environment as bullish for stocks, bonds or the U.S. dollar could be described at present as "irrational."
Further detail will follow in November's "Shadow Government Statistics," targeted for release on Monday, November 27, 2006, following the Thanksgiving holiday.