JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

August 14, 2009

__________

Official July CPI-U Annual Inflation of -2.1% (SGS +5.4%)

Monthly and Annual CPI Should Jump in August

Net of Bad Auto Seasonals, July Industrial Production Contracted

__________

PLEASE NOTE: The next Flash Update is planned for Tuesday (August 18th), following release of the PPI and residential construction (housing starts) series.

– Best wishes to all, John Williams

Thank Goodness for Seasonal Adjustments. Seasonal adjustments to government economic series generate misleading results during unusual times. In the best of circumstances, seasonally-adjusted data present patterns of economic activity with the effects of regular seasonal variations removed with some degree of significance. Even so, those results often are misleading. In unusual times, when regular business patterns are disrupted seriously by economic collapse, for example, the resulting patterns of reported seasonally-adjusted monthly activity can be very wrong. Such was the case in today’s (August 14th) reporting of industrial production and (possibly) the consumer price index (CPI).  

As discussed in the August 7th Flash Update, irregular auto production line closures — for what usually has been regular re-tooling for the new model year — warped key seasonal adjustments for August reporting, artificially spiking the purchasing managers manufacturing survey and the payroll employment levels, and artificially depressing new claims for unemployment insurance and the unemployment rate. The same problem accounted for all of the reported increase in August industrial production. On the inflation front, seasonal factors boosted reported gasoline prices with less vigor than usually is seen at this time of year. Nonetheless, as discussed below, the annual decline in CPI-U inflation likely is at its near-term nadir. 

As the bad seasonals reverse, look for much weaker production (and employment, etc.) and much higher inflation in the next round of monthly reports.  

Dominated Again by Gasoline Prices, CPI Faces August Upswing. Due to a short-lived July dip in oil and gasoline prices, the Bureau of Labor Statistics (BLS) reported an unadjusted monthly decline of gasoline prices in July of 3.4%. Such narrowed to a 0.8% decline after seasonal adjustment. In July 2008, a 0.7% unadjusted monthly gain translated to a 4.1% gain on an adjusted basis, a magnitude of gasoline pricing alteration that was not reflected fully in the 2009 numbers. Nonetheless, oil and gasoline prices have rebounded again in August, and they will be going against an August 2008 pattern of an unadjusted 7.4% decline in gasoline narrowing to a 4.2% decline after adjustment. With higher (not lower) gasoline prices in August 2009, the reported CPI should show a monthly gain as well as a narrowing of the annual decline in the CPI, setting a July trough for the current cycle of inflation reporting.

CPI-U.  The BLS reported that the seasonally-adjusted July CPI-U (Consumer Price Index for All Urban Consumers) was unchanged (down by 0.16% unadjusted) +/- 0.12% (95% confidence interval not seasonally adjusted) for the month, versus a gain of 0.74% (up by 0.86% unadjusted) in June. Unadjusted year-to-year inflation declined further (formal deflation), down by 2.10% +/- 0.20% (95% confidence interval) in July, versus a 1.43% contraction in June. Seasonally-adjusted, the compound annual rate of inflation for the three months ended July was 3.4%, per the BLS.

The reported June CPI-U year-to-year decline was largest since January 1950. I estimate, however, that CPI reporting methods used in 1950 would generate a reported current inflation rate of roughly 5% (see Alternative Consumer Inflation Measures below).

For those interested in exploring the various facets of official CPI-U reporting, I continue to refer you to CPIwatch.com, a site prepared by one of my SGS colleagues.

Annual inflation would increase or decrease in August 2009 reporting, dependent on the seasonally-adjusted monthly change, versus the "flat" (0.02% decline) adjusted monthly change seen in August 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 July’s annual inflation rate of negative 2.10%. CPI-U annual inflation should be at its trough for the current cycle, with accelerating upticks in annual inflation likely starting next month.

CPI-W.  The BLS reported that the narrower, seasonally-adjusted July CPI-W (CPI for Urban Wage Earners and Clerical Workers) rose by 0.03% (down by 0.21% unadjusted), following a 0.92% (1.05% unadjusted) increase in June.  Year-to-year, CPI-W inflation declined by 2.67% in July, following a 1.98% decline in June.

C-CPI-U.  Year-to-year or annual inflation for the Chain Weighted CPI-U — the fully substitution-based series that gets touted by CPI opponents and inflation apologists as the replacement for the CPI-U — fell by 1.89% in July, versus a 1.26% decline in June. Less-negative C-CPI-U annual inflation rate versus the CPI-U suggests reporting problems within the various CPI series.  

Alternative Consumer Inflation Measures. Adjusted to pre-Clinton (1990) methodology, annual CPI growth dropped to roughly 1.2% in July versus 1.9% in June, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, weakened to about 5.4% (5.44% for those using the extra digit), versus 6.1% in June. See the Alternate Data tab and Inflation Calculator at www.shadowstats.com, for graphs and data.  The alternative numbers are not adjusted for any near-term manipulations of the data.

The SGS-Alternate Consumer Inflation Measure adjusts on an additive basis for the cumulative impact on the annual inflation rate of various methodological changes made by the BLS. Over the decades, the BLS has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that no longer reflects the constant-standard-of-living concept. Roughly five percentage points of the additive SGS adjustment reflect the BLS’s formal estimate of the impact of methodological changes; roughly two percentage points reflect changes by the BLS, where SGS has estimated the impact, not otherwise published by the BLS.

Real Retail Sales.  Updating yesterday’s (August 13th) Flash Update, inflation- and seasonally-adjusted June retail sales declined by 0.06% (down by 0.05% before inflation adjustment) for the month, versus a revised 0.03% (previously 0.09%) gain in June (up by 0.77% before inflation adjustment). Year-to-year, July real retail sales fell 6.54% (8.31% before inflation adjustment), versus a revised 7.83% (previously 7.89%) decline in June, which was a drop of 8.92% before inflation adjustment.

Smoothed for monthly volatility on a three-month moving-average basis, the July and June real annual declines were 7.75% and 8.72%, respectively. Since December 2008, annual decline in the moving average had held around 9%, a record low for the two historical retail series of the post-World War II era. The pattern here of annual growth moving off its historically low level reflects bottom-bouncing of the series at a low level of activity compared with a period of rapid monthly decline the year before. The monthly level of real retail sales has been virtually flat for the last six months. There is no turnaround in economic activity evident here.

Industrial Production Impacted by Auto and Weather Distortions. As noted in the opening comments, depression-related seasonal-factor distortions spiked auto production data artificially. Net of the reported faux auto surge, the 0.5% monthly total production gain was a 0.1% monthly contraction. Distorting in the other direction was unusually cool weather in July, which depressed utility usage, as well as the production of certain products, which is estimated as a function of utility activity.

Overall, the Federal Reserve reported that seasonally-adjusted July industrial production rose by 0.5% (0.6% net of revisions) for the month, following an unrevised 0.4% decline in June.  Year-to-year contraction in July activity narrowed to 13.1%, from a revised 13.5% (was 13.6%) in June. June’s reading had set a record low for annual production growth since the shutdown of war-time production that followed World War II.

With annual change down 13.1% and with a peak-to-trough (June remains the short-lived current trough) contraction at 14.6%, the industrial sector of the economy (including manufacturing, mining and utilities) continued in depression. A depression is defined (SGS) as a recession where the peak-to-trough economic contraction exceeds 10%.

As previously noted, since the index of industrial production was introduced in 1919, there have been four down cycles worse than what has been seen so far in the current downturn. In each instance, the trough reflected an annual decline somewhat in excess of 30%. Those four cycles were: (1) the post-war production shut-down following World War II; (2) and (3) the double dip of the Great Depression; (4) the post-World War I and post-Panama Canal production shutdowns in the early 1920s.

Week Ahead.  July Housing Starts. Due for release on Tuesday, August 18th, the reported monthly change in housing starts is not likely to be statistically significant. The level of starts, however, should show continued bottom-bouncing, with severe year-to-year decline.

Producer Price Index (PPI). Due for release on Tuesday, August 18th, expectations are for a 0.2% monthly decline per Briefing.com, but the energy-price-boosting seasonal adjustments still offer some risk of an upside surprise, despite the weaker seasonals in the CPI reporting.

__________