JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

May 4, 2009

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 No Recovery, As Employment Conditions Weaken

Systemic Solvency Crisis Intensifies
As Broad Money Growth Softens Further

U.S. Dollar Selling Could Pick Up
Along with Fed’s Ongoing Dollar Debasement Efforts

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PLEASE NOTE: The next planned Flash Update will follow the release of the April employment report on Friday, May 8th.

– Best wishes to all, John Williams

Recovery Is Not in Play. The Federal Open Market Committee (FOMC) noted in its April 29th press release, that "the economy has continued to contract, though the pace of contraction appears to be somewhat slower…" The FOMC also indicated that "the economic outlook has improved modestly…" The Fed remains extremely cautious in the wording of its statements, and saying that the "outlook has improved" is not the same thing as saying the "economy has improved or is improving," irrespective of the ensuing hype on Wall Street. Again, the FOMC’s opening comment was one indicating continued economic contraction. Indeed, the evidence remains of ongoing economic contraction, despite some continued bottom-bouncing in series such as the purchasing managers survey (see discussion in the employment section).

As to the daily hype hitting the markets as to "better-than-expected numbers," keep looking at year-to-year change smoothed over several months, rather month-to-month change that usually lacks statistical significance. As to anything involving existing or pending homes sales, keep mind that the numbers are skewed very heavily by foreclosure activity, as discussed in the most recent SGS Newsletter (No. 50), in the housing starts comments in the Reporting Perspective section. 

Employment Conditions Remain Dismal. Contrary to some recent stories in the popular press, employment is a coincident indicator of broad economic activity, not a lagging indicator. As such it is used by the Conference Board as one of its coincident indicators in the series of leading, coincident and lagging economic indicators taken over from federal government reporting, some years back. The National Bureau of Economic Research (NBER) — official arbiter of U.S. recessions — also uses payroll employment as one element in setting the precise timing of the onset of a recession. Perversely, however, the NBER ignored ongoing employment contractions in order to call early ends to the 1990/1991 and 2001 recessions, and such may have become the basis for citing employment as a lagging indicator.

That said, the April employment report is due for release on Friday (May 8th), and expectations (per Briefing.com) are for a month-to-month payroll employment decline of about 620,000 (versus a 663,000 decline in March), with the U.3 unemployment rate rising to roughly 8.9% from 8.5%. Something shy of the consensus jobs decline — a decline less severe than the month before — would meet both political and short-lived financial-market needs, even if it resulted from continued obfuscation of headline-number reality, through prior-period revisions and/or questionable seasonal-factor adjustments. Based on the better-quality underlying series discussed below (all are leading indicators to the jobs report), the jobs loss should exceed 750,000 (at least in later revisions).    

New Claims for Unemployment Insurance: Despite the regular weekly volatility of the series, the ongoing rapid rise in initial claims for unemployment insurance has continued to reflect the severe deterioration in labor market conditions, where a rising growth trend in new claims is an economic negative. On a smoothed basis for the 17 weeks ended April 25th, year-to-year growth hit 75.7%, its highest level since the 1975 recession and closing in on its historical peak growth rate of 78.8% seen in March 1975. The latest annual growth was up from 72.4% as of the 17 weeks ended March 28th, and up from 66.9% in the 17 weeks ended February 28th. A year ago (April 26, 2008) claims were increasing at an annual pace of 23.6%.

Help-Wanted Advertising (HWA):The March help-wanted advertising index (newspapers) collapsed to an historic low of 10 (lowest since the creation of the series in January 1951), from the prior record low of 12 that had held for three months through February. The Conference Board measure was down year-to-year by a record 47.4% in March, versus a 42.9% decline in February. 

Despite some of the historic weakness in the newspaper series being due to the loss of ads to the Internet, and despite its looming abandonment by the Conference Board, the HWA newspaper index remains a solid leading indicator to the broad economy and to the monthly employment report. It continues to signal severe deepening in the recession and ongoing deterioration in labor-market conditions. The nascent online surveys are telling a similar story.

The deepening annual fall-off in new online help-wanted advertising (Conference Board) continued, down 38.6% in April, versus a 36.0% year-to-year decline in March. The Monster.com online survey estimated that online jobs offerings were down 29% year-to-year in March, versus a 26% decline in February.

Purchasing Managers Survey (Manufacturing): The April purchasing managers survey’s composite index rose to 40.1, from 36.3 in March, still well below the 50.0 that signals a contraction in manufacturing (and recession per SGS), and below the 41.8 that the Institute for Supply Management (ISM) formally considers as a recession indicator. The index components are diffusion indices that are compiled as the percentage of survey respondents indicating improving conditions plus one half of those who indicate conditions are unchanged.

The April employment index rose to 34.4 from 28.1, but it did not show an improving economy so much as it indicated one where deterioration had eased. Rapidly declining activity eventually tends to bottom-bounce, as business falls to a low-level plateau of activity. What happened with the April employment component is instructive, as well as indicative of what happened to other key indices, such as new orders (rose to 47.2 from 41.2), production (rose to 40.4 from 36.4) and prices paid (rose to 32.0 from 31.0).

As to the employment number, survey participants indicated conditions in April as follows: higher 7%, same 58%, lower 35%. Such contrasted with March’s: higher 8%, same 41%, lower 51%. The reported improvement came from a reduction in those reporting lower employment (shifting to same or higher), but the higher percentage also dropped. So, as would be typical with bottom-bouncing, part of the downside turned to unchanged, even the though the upside still deteriorated. Separately, seasonal adjustments distort the reporting, which best is viewed on a three-month moving-average basis in terms of assessing significant changes. On that basis, the April employment reading was 29.5 versus 28.0 in March. The March reading was the lowest since the series was started in January 1948.

Covering the real estate and banking industries, among others, the March services-sector employment component eased to a near record-low 32.3, from 37.3 in February.  The series, however, only goes back to 1997.

Consumer Confidence Reflects Happy Talk.  Reported consumer confidence easily is swayed by the tone of the popular media towards the state of economy and the financial markets. Such was established some years back by David Fan of the University of Minnesota. Accordingly, recent happy spins put on a variety of economic releases likely added some upside pressures to the April numbers.

April consumer confidence numbers bounced sharply, with mixed results year-to-year. The Conference Board’s April 2009 Consumer Confidence measure rose by 45.7% month-to-month, up from a 6.3% increase in March, and up from a 32.4% decline in February, which had set the historic low for the series (lowest since the Lyndon Johnson Administration). Year-to-year change for the three-month moving average as of April was still deep in recession territory, down 55.4%, following a record 61.0% decline in March.

The Reuters/University of Michigan’s Consumer Sentiment measure rose by 13.6% for the month of April, following a 1.8% gain in March, following an 8.0% decline in February. Year-to-year change in the Sentiment three-month moving average was down by 11.9% in April, narrowing sharply from the 20.1% decline in March.

As the talk of economic recovery begins to wear thin with the public, and the stock market falters anew, these series should turn sharply lower again. As lagging, not leading indicators, they confirm that the economy has been in a deep recession.

Money Supply Growth Slows Despite Fed’s Accelerating Efforts to Debase the Dollar. Based on 20/22 of 30 days of reporting in key components of M3, the SGS-Ongoing M3 Estimate appears headed for a small month-to-month contraction, with annual growth slowing from roughly 8.2% in March to around 7% in April. A hard estimate on the monthly number will be published next weekend.   Continued slowing growth of the broad money measure indicates an intensifying systemic solvency crisis, as also suggested by recent Fed monetary activity.

Reflecting intensified systemic liquefaction efforts by the Fed, annual growth in the St. Louis Fed’s Adjusted Monetary Base jumping to a record high 112.5% in the two weeks ended April 22nd, up from 105.9% in the prior two-week period. Such was up sharply from the recent trough of 81.9% in the two weeks ended February 11th and topped the prior record growth of 107.2% seen in the two weeks ended January 14th. The bulk of volatility in the series has been due to variations in excess reserves. The monetary base (basically currency plus bank reserves) is the Fed’s primary tool for targeting growth in the money supply.

Of continued significance to the broader money measures, annual growth in required reserves (seasonally-unadjusted) held at 34.4%, down minimally from 34.8% in the prior two weeks.   Such still remains shy of the record 57.6% annual growth reported for the two weeks ended February 11th.

U.S. Dollar Remains Key to Inflation Pick-Up. Perhaps reflecting the Fed’s increasing efforts at U.S. dollar debasement, the U.S. currency has been under some minor selling pressure in the last week or two. As the Fed’s efforts begin to "succeed," and investors increasingly lose confidence in the greenback, intense dollar selling/dumping should kick-in. Dollar-denominated commodities such as oil should see dollar-based pricing spikes, as a result, with that circumstance beginning to fuel a non-demand driven inflation in the United States, much as was seen last year.

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