Alert
A L E R T
July 29, 2007
__________
Reported GDP Rebound was Politically Convenient
2nd-Quarter GDP Contracted 0.9% Net of Revisions
Signs of Imploding Economy Mount
Oil Price a Penny Shy of Record
Stock Market Swoon Foreshadows Much Worse
__________
The SGS-Alternate GDP series database has been updated for the "advance" second-quarter report and annual revisions and posted (Alternate Data Series tab at www.shadowstats.com). The SGS-Alternate GDP series itself, however, has not been revised, yet. It is subject to minor changes, given the government's restated data, to be addressed in the next newsletter's "Reporting/Market Focus." -- Best wishes to all -- John Williams
The U.S. financial markets will face massive and possibly panicked sell-offs in stocks, bonds and the U.S dollar, along with an explosive rally in the price of gold. Timing remains the issue, but this week's break in stock-market psychology has moved the odds strongly and solidly in favor of looming market meltdowns within a six-to-nine month horizon. Circumstances remain fluid enough, though, that given the right confluence of negative factors -- as discussed below -- the markets could spiral into the abyss at anytime, including within the next week or so. Faced with short-term financial-market and political pummeling, President George Bush sought a breather with the second-quarter GDP numbers. He and his spinmeisters boasted of U.S. economic growth rebounding to 3.4%, from the first quarter's 0.6%, but the improved numbers were just figments of the imaginations of officials at the Bureau of Economic Analysis (BEA). Other reporting showed rapidly deteriorating business activity, while inflation prospects took a new blow.
Accompanying last week's stock-market selling were supposed flights-to-quality in the U.S. dollar and U.S. Treasuries. Indeed, except for selling against the yen, the dollar tended to gain ground, as gold sold off and as Treasury yields flattened out. Keep in mind that each of these markets is subject to central bank manipulation, covert or otherwise, particularly in times of financial stress.
At such time as a true financial panic might hit, flight will be out of the dollar and dollar-denominated assets (including stocks and bonds), and into the stronger major currencies and gold. Watch the dollar, it will be driving the other markets. When dollar dumping begins in earnest, no amount of intervention will have lasting impact.
As noted in the last newsletter, the fundamentals underlying the U.S. currency remain extraordinarily negative. While general movement against the dollar has begun, heavy dollar selling has not hit, yet. The timing of the ultimate move against the greenback remains uncertain, but the crisis likely will come sooner (next several months), rather than later, with little or no warning.
The proximal trigger for a dollar panic likely will involve a confluence of negative factors or surprises. Those could include a bad economic statistic, political missteps by the Administration or a central bank, a major systemic failure, negative trade or market developments in Asia, oil price problems, or a terrorist attack or even still-likely military action against Iran. Again, when it hits, the broad selling pressure against the U.S. currency should be strong enough to overcome any short-lived central bank intervention.
GDP. Not hyped in yesterday's post-GDP White House/Wall Street/popular financial media love-fest were the significant downward revisions made to previously reported GDP growth (regular annual GDP revisions) published along with the second-quarter GDP. Annualized quarterly real (inflation-adjusted) growth for second-quarter 2007 was indicated at 3.38%, up from 0.60% in the first quarter, and where annual growth came in at 1.78%, up from 1.55% in the first quarter. Please note, though, that last month's weak "final" estimate revision showed first-quarter annual growth at 1.91% -- before revisions -- a rate that was stronger then than the second quarter's "booming" 1.78% annual growth rate is now.
In fact, net of the revisions, second-quarter GDP contracted at an annualized quarterly rate of 0.86%. As suggested in recent SGS newsletters, previously reported GDP growth was revised downward significantly (the revisions were planned so as to affect only first-quarter 2004 and later), and none of the quarterly numbers turned negative in after the restatement.
The above graphs show the prior GDP reporting as the thin red lines, and the revisions, as well as the new "advance" second-quarter GDP estimate, as the thick blue lines. The first graph shows GDP growth on a year-to-year basis, the second graph shows it on an annualized quarterly basis.
The revisions will be more fully explored in the upcoming August 2007 "SGS Reporting/Market Focus." Briefly, the lower real GDP reflected both downward revisions to nominal GDP, as well as, prior to fourth-quarter 2006, upward revisions the GDP deflator (inflation). Income revisions were mixed, revising upward in 2004 and 2005, and downward in 2006. Gimmicked changes on the income side resulted from games played with corporate profits as well as with the rental income homeowners' purportedly have been paying themselves.
Back on Main Street, U.S.A., real retail sales contracted in the second quarter, new orders for durable are showing negative annual real growth, housing continues to collapse, and help-wanted advertising sank anew, to its lowest level since 1958. These factors all suggest a weakening second quarter, not a politically comfortable rebound.
In constructing the "advance" estimate for a quarter's GDP, the BEA has little in hard numbers and is 90% to 95% in guesstimation mode. That gives the Bureau extraordinary latitude in coming up with its first guess. Usually, the BEA targets consensus forecasts as the best estimate of reality, and, not so coincidentally, the consensus going into Friday's release was 3.4%.
The purported economic rebound was hoped to be a help to the Administration and the financial markets, but the first President Bush learned painfully how the public can view rigged GDP numbers as an indication of the President's being out of touch with reality. The current President Bush is at risk of a similar fate, but he is not up for re-election as was his father.
New Orders for Durable Goods. Running counter to the relative strength in second-quarter GDP, the 1.4% monthly gain reported for June durable goods orders left the series down by 0.6% year-to-year. Net of the impact of Boeing's successful launch of the 787 (the benefit from which gets spread out over years, not just one month), June's new orders were down by 0.5% for the month, and down by 2.5% for the year.
Using a six-month moving-average, annual growth for regularly volatile durable goods orders had been in steady decline from last September (then up 7.4%) to February 2007 (up 2.4%), but then it dropped below 1.0% for every month from March through June, respectively a contraction of 0.1%, and gains of 0.2%, 0.6% and 0.3%. These levels are underwater after inflation adjustment and are consistent with a deteriorating economy, not a rebound.
Help-Wanted Advertising. June's help-wanted index dropped to 26 from 27 in May. June's reading is the lowest since July 1958, and is just 2 points above the series' all-time low of 24 seen in April and May of 1958. Allowing for the movement of ads away from newspapers to the Internet, the annual decline of 18.8% still signals a deepening economic contraction and a deteriorating labor market.
Housing and Consumer Confidence. Despite a 6.0% monthly jump in the University of Michigan's consumer sentiment measure, housing data continued to fall both month-to-month and year-to-year. June existing home sales fell 3.8% for the month and 11.4% for the year, while new home sales were down 6.6% for the month and dropped 22.3% at an annual pace.
Oil Prices. Oil (West Texas Intermediate spot) closed at $77.02 per barrel on Friday, just a penny shy of the record-high close of July 14, 2006, which was the only time prior to Friday that the price closed above $77.00. Unfortunately the current trading is not in the context of extreme market conditions.
With political risks in the Middle East high and rising, with the hurricane season about to kick in with whatever Mother Nature is going to throw at the Gulf of Mexico's energy-related facilities this year, and with the U.S. dollar generally under selling pressure, not only is the risk to oil prices sharply to the upside, but also inflation pressures in the United States are receiving a sharp spike, with meaningful further upside risk.
Week Ahead: July Payrolls. While prior-period catch-up and related series such, as help-wanted advertising, would suggest weaker-than-consensus payrolls and unemployment, political and financial conditions argue strongly for rigged numbers on the strong side of market expectations.
Additional detail will follow in the August SGS newsletter. The upcoming "Reporting/Market Focus" will cover the GDP annual revisions and update the SGS-Alternate GDP.
The August "Shadow Government Statistics" monthly newsletter is targeted for the week of August 13th. An e-mail advice will be made of same and intervening Flash Updates/Alerts.