Signals Mount of Non-Demand-Driven U.S. Inflation Threat. Fed Chairman Bernanke’s "green shoots" are sprouting, but only for inflation, not for a turnaround in collapsing economic activity. At work here are increasing dollar weakness and a possible developing positive shift in money supply growth. Thanks at least partially to the Fed’s efforts to debase the U.S. dollar, the greenback has been in gradual decline recently, dropping today to trade-weighted levels against the major currencies not seen since mid-December. Largely reflecting the dollar’s weakness, oil prices are their highest since early November, and gasoline prices appear likely to be up 12% to 13% in May, versus April, nearly double the rate of the monthly gain seen last year.

The accelerating increase in gasoline prices is due largely to factors other than rising economic demand, again primarily due to pressures related to U.S. dollar weakness. Oil remains the dominant commodity affecting U.S. inflation. Irrespective of any near-term market volatility, long-range weakness in the dollar should be reflected in long-range upside pressures on U.S. dollar-denominated commodity prices (particularly oil) and on related upside pressures on U.S. consumer inflation. 

The recent strength in gold prices also reflects growing dollar-based inflation fears, as well safe-haven flight from the still ongoing instabilities in the financial markets and the financial system.

Positive Shift in Money Growth. There also has been a positive shift in the recent seasonally-adjusted weekly growth patterns of the still-published or largely published M3 components (Federal Reserve Board Publication): M2 (H.6), institutional money funds (H.6) and large time deposits (H.8). One has to consider the possibility here that the Fed’s weekly seasonal adjustments may have been thrown off by the extreme reduction in tax receipts seen in April due to the recession. The tax payments around the April 15th tax date usually have regular seasonal impact on the money supply.

Nonetheless, where broad money growth — as indicated by the SGS-Ongoing M3 estimate — slowed on a year-to-year basis in March and April (April growth slowed to 7.1%, from 8.2% in March, and from 9.5% in February), a continuation of current weekly patterns would suggest a rebound in annual growth in May, possibly back above 8% (money supply details based on full-month reporting for April are available at the Alternate Data tab on www.shadowstats.com.)   

Where the slowing in M3 annual growth generally has suggested an intensification of the ongoing systemic solvency crisis, a reversal of trends here would suggest some improvement in conditions, as well as mounting inflationary pressures. As cash comes out from under the mattresses and re-enters the depository system, the velocity of money (turnover of the money supply in the GDP, see Money Supply Special Report on www.shadowstats.com) also should begin to increase.  

As of the week ended April 13th (for H.6, April 15th for H.8) the published M3 components showed an annualized contraction for the week of 1.5%, and an annualized contraction for four weeks of 10.2%. Similarly, for the week ended April 20th, the annualized weekly growth rate was 19.8%; the annualized change over four weeks was a 4.3% contraction.  For the week ended April 27th, the annualized weekly growth rate was 19.3%; the annualized growth over four weeks was 3.3%. For the week ended May 4th, the annualized weekly growth rate was 38.0%; the annualized growth over four weeks was 18.1%.

The Fed’s efforts at extreme liquefaction of the system and debasement of the U.S. currency have continued. Although the year-to-year change in the seasonally-adjusted St. Louis Fed’s adjusted monetary base slowed minimally to 103% in the two-week period ended May 6th, from a record 112% in the prior period, annual growth in unadjusted required reserves jumped to 45.6% in the latest period, from 34.5% in the prior period, consistent with the surge in the report M3 components during the same timeframe.

Annual Housing Starts Contraction Continued at Record Pace in April. Yesterday’s (May 19th) release of seasonally-adjusted housing starts by the Census Bureau showed no improvement in housing-market conditions. Annual revisions had little impact on the annual totals. The highly volatile series showed a 12.8% decline +/-15.8% (95% confidence interval) in April, following a revised 9.2% decline in March. While the economic green-shootists hyped a monthly increase of 2.8% +/-19.9% (95% confidence) in single family homes, neither the aggregate monthly decline nor the single family increase was statistically significant on a monthly basis. Year-to-year, April housing starts fell by 54.2% +/- 7.3% (95% confidence interval), versus a 47.1% decline in March. Single family home sales in April fell 45.6% +/-7.4%. April’s 54.2% annual hit for total housing starts was the steepest decline in the history of the series, except for a 54.9% drop in January. On a three-month moving-average basis, the April year-to-year contraction was 49.7% versus a record 50.0% plunge in March. The SGS definition of a great depression is a recession with a peak-to-trough inflation-adjusted contraction in excess of 25%. Peak-to-trough this series stands at a 79.9% contraction, with January 2006 the peak, and the current April 2009 reading a short-lived trough. Single family homes are down peak-to-trough by 80.4%, with a temporary trough in February 2009.      

Week Ahead. New Orders for Durable Goods: Due for release on May 28th (Thursday), the highly volatile durable goods orders series should show continued sharp annual contraction in April, while the monthly change could go either way.

Gross Domestic Product: The "preliminary" estimate revision of first-quarter 2009 GDP is expected to show an annualized, inflation-adjusted decline of 5.5% (per Briefing.com), narrowed from the "advance" estimate of a 6.1% decline. Revisions to retail sales and industrial production suggest that the contraction should be more severe than reported initially, but the heavily-massaged reporting tends to move in the direction of the consensus forecasts. Look for major downward revisions to the series to surface with the July benchmark revision.