JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

July 10, 2009

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No Abatement in U.S. Economic or Solvency Crises

May Trade Data Suggest U.S. Business Activity Suffering
More Than Rest of World

Broad Money Growth Slows Anew

New Stimulus and Bailout Packages Likely

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PLEASE NOTE: The SGS Newsletter is planned for next week. Irrespective of its actual publication date, a Flash Update is planned for Tuesday, July 14th, after releases of the June retail sales and producer price index reports, as well as for Wednesday, July 15th, following releases of the June consumer price index and industrial production reports. As will be discussed further in the newsletter, an updated hyperinflation report will follow shortly, and there also will be a special report following the July 31st grand benchmark revision to the gross domestic product.

As discussed below, monthly average estimates for June M1, M2 and M3 will be posted over the weekend on the Alternate Data tab at www.shadowstats.com.

– Best wishes to all, John Williams

Economic and Solvency Woes Continue. Other than for some patterns of declining annual economic activity plateauing at historically low levels — an artifact of prolonged and severe contractions in business activity, not of an economic bottoming process — those who had been seeing green shoots increasingly are looking at wilted stems or thriving weeds. Nonetheless, while talk of a second economic stimulus package is gaining momentum in Washington, efforts to show and to sell the concept of a stabilizing economy should continue at full force, in a doomed effort to prop consumer and investor confidence artificially. At the same time, slowing growth in the broad money supply suggests that the systemic solvency crisis remains dangerously unsettled.

This morning’s (July 10th) report of an improved trade deficit for the month of May will help in generating a happier "advance" estimate of second-quarter GDP on July 31st. While that estimate, issued in conjunction with a grand-scale benchmark revision of the series back to 1929, should be in the context of a longer and deeper recession than previously reported, the markets rarely are moved by prior-period revisions. Headlines and the markets likely will concentrate on a purported narrowing of the pace of quarterly contraction in the second-quarter GDP.

Likewise, market hype over any spurious short-term "positive" reporting also should remain intense, while the longer term trends should continue to deteriorate. For example, as frequently discussed in previous writings, weekly new claims for unemployment insurance are extremely volatile and usually suffer heavy distortion around holidays, since the Department of Labor cannot adequately adjust same for seasonal variations. Such was the reason behind the sharp weekly drop in claims reported yesterday (July 9th), for the week ended July 4th.

In contrast, next week’s reporting on retail sales, industrial production and housing starts are likely to show historic low-level plateauing or further declines in annual activity, consistent with a deepening economic contraction.

Separately, if the May trade data were to be believed, rising exports and falling imports are suggestive of relatively worse economic activity in the United States versus activity in the economies of the United States’ major trading partners. Such would add heavily to downside market pressures on the U.S. dollar.

The combination of the economic and solvency issues likely will push U.S. politicians into new stimulus and bailout packages, regardless of criticism from major holders of U.S. dollars and dollar-denominated assets. Given the traditional six-to-nine month lead time between fiscal stimulus and economic activity, the first stimulus package should be starting to have impact only in the next several months. Nonetheless, a second package likely will be pushed by Congress as members begin to panic over the economy’s likely impact on the 2010 mid-term elections.

With no serious addressing of the structural issues currently impairing business activity, this downturn will be particularly deep and protracted, and it will continue generally to be unresponsive to traditional stimuli. With the credit system still in deep freeze, intensified efforts at systemic liquefaction by the Federal Reserve likely will follow, soon. Heavy Fed monetization of Treasury borrowing for the stimulus packages would have the greatest impact on broad money growth. The Fed’s desire to prevent systemic collapse should trump concerns of waning foreign investment in dollar assets or of looming inflation problems, although ostensibly the Fed is trying to stimulate inflation with its ongoing dollar debasement.

My general outlook remains unchanged.

May Trade Deficit Narrowed Sharply. The Census Bureau and Bureau of Economic Analysis reported this morning (July 10th) that the seasonally-adjusted May trade deficit narrowed to $26.0 billion from a revised $28.8 (was $29.2) billion in April. Exports picked up, while imports eased, despite rising oil prices. Stronger exports suggest strengthening economies abroad, while falling imports suggest weakening demand at home. At work here may be unusual disruptions to merchandise flows from the auto industry’s reorganization.  Also, as was seen in 2008 reporting, significant distortions from less than timely paperwork flows likely is affecting results, again. An import transaction is tallied as of the month that the paperwork makes it into the trade data reporting, not when the import actually occurs. While revisions are made regularly for one month back in time, last year’s reporting showed significant lags (more than one month) that caused a large negative revision to 2008 reporting. As mentioned above, the reported deficit narrowing will be a boost to the initial reporting of the pending second-quarter GDP estimate.  

Annual M3 Growth Likely Slipped into the Mid-6%Range. The Fed’s information on the banking system remains far from perfect, given the regular major revisions published for the monetary aggregates, and given the large gaps and inconsistencies seen in many series reported with the Fed’s quarterly flow-of-funds data. Revisions and unusual volatility in the last month’s reporting of weekly money supply data have delayed my publishing an initial calculation for the monthly average SGS-Ongoing M3 estimate, which will be posted this weekend on the Alternate Data tab at www.shadowstats.com, following numbers due for release after the close of the markets, today (July 10th).

Based on available data for the month, M1 should show sharp spikes in both monthly and annual growth, with June annual growth at about 18.4%, versus a revised 15.4% (was 16.2%) in May. M2 showed a small monthly gain, with annual growth rising to about 9.0% in June, versus a revised 8.8% (was 9.0%) in May. M3 likely will be flat month-to-month, with June annual growth around 6.4%, down from 7.1% (previously 7.2%) in May. Such slowing in annual M3 growth often has signaled intensifying systemic liquidity issues. Since M1 is part of M2, and M2 is part of M3, differences in annual growth rates often reflect nothing more than shifts between accounts in the different components. For example declining large time deposits and institutional money funds reflected in June’s non-M2 components of M3 may have shifted to checking accounts, where they would be reflected in stronger relative M1 and M2 growth rates.

In terms of the monetary base — the Fed’s primary tool, in theory, for affecting the money supply — year-to-year change slipped to 89.9% in the two-week period ended July 1st, down from 102.7% in prior two-week period. The monetary base consists basically of currency in circulation plus bank reserves, and the drop in annual growth reflected a decline in excess reserves. Annual growth in required reserves, however, held at 40.9% in the latest period versus 41.4% in the prior two-week period. These data are a week advanced on money supply reporting. It will be interesting to see how the reported decline in excess reserves plays out against recent Treasury auctions.

Week Ahead. Retail Sales: Due for release on Tuesday (July 14th), any monthly gain reported in June retail sales likely will be due entirely to inflation. Accordingly, net of inflation, monthly retail sales should have contracted, with the annual decline holding at its historic low.

Producer Price Index: Due for release Tuesday (July 14th), the June PPI should be boosted by higher oil prices and costs of related goods. As with the CPI, energy-price-depressing seasonal factors of the last several months start to disappear in June. Accordingly, there is some upside risk to expectations (around 0.8% per Briefing.com).

Consumer Price Index: Due for release Wednesday (July 15th), the June CPI-U has a shot at seeing a flattening or minor uptick in the annual inflation rate. June’s monthly average gasoline price rose by 15.8% (per the Department of Energy), more than double the 7.6% monthly increase seen in June 2008. The energy-price-depressing seasonal adjustments of recent months washout in June and strongly reverse direction in July and August. Per Briefing.com, where consensus expectations are for about a 0.6% monthly CPI-U gain, there is some upside reporting risk to expectations.

Annual inflation would increase or decrease in June 2009 reporting, dependent on the seasonally-adjusted monthly change, versus the 0.93% adjusted monthly increase seen in June 2008.  I use the adjusted change here, since that is how consensus expectations are expressed. The difference in growth would directly add to or subtract from May’s annual inflation rate of negative 1.28%.

Industrial Production: Due for release Wednesday (July 15th), June industrial production should show a further monthly decline as well as a deepening annual downturn. The annual 13.4% decline in May was the deepest since war production was shut down at the end of World War II.

Housing Starts:Due for release next Friday (July 17th), June housing starts are highly volatile on a month-to-month basis. Any such reported gain or loss likely will not be statistically significant, unless they exceed plus or minus 20%. Annual decline, however, should remain close to its historic low.

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