Flash Update
FLASH UPDATE
September 9, 2007
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Consistently-Adjusted August Payrolls Plunged 82,000
Annual M3 Growth Hit 14% in August
Inflationary Recession Still Befuddles a Fed Set to Ease
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PLEASE NOTE: The SGS-Ongoing M3 series for August has been updated and posted to the Alternate Data Series tab at www.shadowstats.com. -- Best wishes to all, John Williams
When the popular media and consensus economists start talking recession, usually an economic downturn already has been underway for a year or so. The 2000 recession gained rapid recognition following 9-11, but the terrorist attacks did not trigger the downturn. The recession had been in place for over a year; the attacks only deepened an ongoing contraction. In like manner, the current recession has been underway for well over a year, but it was not triggered by the liquidity crisis that erupted in August, only intensified by it. The impact of the liquidity problems still will not show up in most economic data until next month. The exceedingly weak August payroll survey was conducted before the crisis had much impact. What appears to have happened was that someone in the Administration decided to recognize the recession and released weak numbers either to force or to help accommodate the Fed in justifying an imminent easing. Yet, there also is a worsening inflation problem, with high oil and food prices, a weakening U.S. dollar and exploding money supply growth. And, then, there also is the threat of U.S. dollar dumping with the U.S. financial markets dependent on foreign capital for liquidity.
Market speculation following, the jobs report, moved towards a Fed easing. As a result, the U.S. dollar came under selling pressure and the price of gold rose. Therein is the problem for the U.S. central bank. Fed Chairman Bernanke's dollar fears likely are why this weekend's big media stories assuring a coming Fed rate cut were interspersed with occasional stories to the effect that an easing is no sure thing. While inflation remains an issue, the big problem for the Fed is the greenback, and the financial media largely are ignoring that. There are those in the Administration, too, who do not think the dollar counts.
The construct of the jobs report suggests a deliberately negative rendition of August employment was put forth. In turn, that probably indicates that Treasury Secretary Paulson, Administration political hacks and Wall Street want a rate cut, now, with corresponding increased pressure on Mr. Bernanke to ease. However the game plays out, dollar selling increasingly will intensify, and the U.S. financial markets will suffer the consequences, with sharply higher long-term interest rates and sharply lower equity prices, while gold should continue to boom.
In any event, the unofficial easing continues, with the Fed either unwilling or unable to hit its 5.25% formal fed funds target most of the time, as shown in the accompanying graph.
Since the Fed already has eased effectively by 25 basis points, and since the politicians now are lining up for lower rates, odds should favor a formal Fed easing of 25 basis points at the September 18th FOMC meeting, if not before. Mr. Bernanke will be hoping for a muted currency response, and heavy central bank intervention, covert or otherwise, will be likely in an effort to assure same. The Fed and Treasury will work hard on market expectations before the FOMC gathering. Whatever the evolved pre-FOMC consensus becomes, that likely will be the Fed's action, designed to be as minimally disruptive to the markets as possible.
Employment Reporting Pushed into Recession Mode. The Bureau of Labor Statistics (BLS) easily could have shown a month-to-month gain in August payrolls, instead of a small decline, if it wanted to. It also could have shown the much weaker growth that is inherent in the underlying reported numbers, but the intent here seems to have been not to scare the markets too terribly, just to push consensus forecasts into the recession camp and the Fed into an easing. Also aimed at tempering market reaction, the unemployment rate was held unchanged.
These numbers do not reflect the impact of August's liquidity crisis. The payroll survey is based on the pay period (household survey is based on the week) including August 12th. Anyone who worked at all in that period is considered employed. Hence, the data do not reflect any meaningful change due to the liquidity turmoil, which just was beginning to come to a head at that time. The September jobs report, in theory, should begin picking up any carnage in the financial services industry resulting from the liquidity problems.
Seasonally-adjusted August nonfarm payrolls fell by 4,000 (down by 85,000 net of revisions) +/- 129,000 for the month, following a revised 68,000 (previously 92,000) gain in July, and a revised 69,000 (previously 126,000) gain in June. Annual growth has tumbled sharply from 1.47% in June, to 1.31% in July, to 1.12% in August.
As with the last several payroll reports, applying consistent, not-seasonally-adjusted year-to-year change to the seasonally-adjusted numbers yields a weaker than advertised payroll result. Applying August's unadjusted annual growth rate to the adjusted numbers yields an adjusted monthly August payroll plunge of 82,000. Interestingly, where similar analysis last month suggested a 47,000 consistently adjusted monthly gain for July, versus official initial reporting of 92,000, July's seasonal factors were revised in the August report so as to be consistent. On that basis, July's reported growth now is 68,000, higher than my estimated correction, but that only is because of other revisions made to June's data.
The statistically-sounder household survey showed seasonally-adjusted employment tumbling by 316,000 for August, following a 30,000 decline in July. The seasonally-adjusted U.3 unemployment rate held at 4.64% +/- 0.23% in August, versus 4.65% in July. Unadjusted August U.3 fell to 4.6% from 4.9% in July, while the broader U.6 measure eased to 8.4% from 8.6% (unadjusted) but rose to 8.4% from 8.3% (adjusted). Net of the "discouraged workers" defined out of existence by the Clinton Administration, the traditional unemployment rate continues to run around 12%.
The monthly bias factor (birth/death model) in August was an add-on of 120,000, compared with 122,000 a year ago. The add-ons continue to be mindless, such as the 15,000 upside bias in construction, which was the same factor as the year before. Where the September 2006 bias factor was 13,000, such suggests some added downside pressure on the September 2007 payroll estimate.
Purchasing Managers Surveys Mixed. The ISM purchasing managers manufacturing survey eased from 53.8 in July to 52.9 in August. New orders fell from 57.5 to 55.3, with employment rising from 50.2 to 51.3. The non-manufacturing survey held even at 55.8 in August, but employment plummeted from 51.7 in July to 41.7 in August, possibly showing some early liquidity crisis impact. The related prices paid indices showed somewhat softened inflation pressures.
August M3 Annual Growth Hits 14%. On the inflation front, as discussed in the preceding Alert and Flash Update, the Fed's emergency l1quefaction of the financial system has spiked money supply growth. Based on 27 of 31 days of reporting, annual M2 growth rose to 6.7% (a four-year high) in August from 6.1% in July, and SGS-Ongoing M3 estimated annual growth rose to 14.0% (a 34-year high) in August from 13.0% in July. Final August estimates, based on full-month reporting, will be posted to the Alternate Data Series tab next weekend.
Week Ahead: Most data for August will show limited if any impact from recent financial market turmoil. In turn, September numbers should reflect initial impact on business activity. Against expectations of little change, the July trade deficit should widen sharply in Tuesday's (September 11th) report. Relatively strong expectations for Friday's (September 14th) August retail sales and industrial production likely will be disappointed on the downside. The trade number, however, is particularly vulnerable to political manipulations, given U.S. dollar vulnerabilities.
Additional detail will follow in the September SGS newsletter.
With relocation to the San Francisco Bay Area pending in the weeks ahead, the September SGS is targeted for the week of September 17th. An e-mail advice will be made of its and any intervening Flash Update/Alert postings.