JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

 FLASH UPDATE

May 15, 2009

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April CPI-U Annual Deflation of 0.7%
Versus SGS-Alternate Estimate of 6.7% Inflation

Seasonal Factors Mask Rising Monthly Energy Costs

Peak-to-April Industrial Production
Is Down a Depression-Like 16%

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PLEASE NOTE: Aside from April housing starts, which should continue showing great-depression-like annual contractions, next week’s economic reporting calendar is light. The next Flash Update likely will be on Wednesday — possibly earlier — addressing the latest housing and money supply figures, as well as other hot topics of the moment.

– Best wishes to all, John Williams

Consumer Price Deflation Nears Bottom.   I never have favored the media’s emphasis on seasonally-adjusted consumer inflation (as opposed to the BLS’s emphasis on the unadjusted series), since the monthly results do not reflect common experience. In April reporting, for example, a 5% monthly increase in gasoline prices was turned into a 3% seasonally-adjusted decline. Consumers, however, see their expenses and day-to-day cash outlays in actual money, not some happy hypothetical government statistical construct of what it should be. The offset to the current seasonal-factor depression of gasoline price reporting is the usual flip to the upside in adjusted reporting in the second half of the year. Nonetheless, the sharp rally in oil and gasoline prices so far in May — in conjunction with other rising costs — could be enough to generate an upside adjusted monthly inflation rate in May, as well as a less-negative pace of annual decline in May the CPI-U, perhaps setting the April annual deflation rate as the bottom of the current cycle.

As discussed in the SGS Newsletter No. 50, the risk going forward is for severe inflation, not deflation. The current downturn in consumer prices is dominated by oil-related costs and should be brief and shallow, as seen sporadically in the late-1940s and early 1950s, not catastrophically long and deep as seen in the Great Depression. If inflation today were calculated the way it was back in 1955 — the time of the last minor deflation run — the April 2009 CPI-U annual inflation rate likely would have topped 6%, as discussed below.  

CPI-U.  The Bureau of Labor Statistics (BLS) reported this morning (May 15th) that the seasonally-adjusted April CPI-U declined by 0.02% (up by 0.25% unadjusted) +/- 0.12% (95% confidence interval not seasonally adjusted) for the month, versus a decline of 0.14% (a 0.24% unadjusted gain) in March. For a second month, unadjusted year-to-year inflation declined (formal deflation), down by 0.74% +/- 0.20% (95% confidence interval) in April, versus a 0.38% contraction in March.  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 May 2009 reporting, dependent on the seasonally-adjusted monthly change, versus the 0.49% adjusted monthly increase seen in May 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 April’s annual inflation rate of negative 0.74%. Again with heavy upside pressure on oil prices, annual CPI-U should be near its trough for the current cycle, although another month of minor official deflation appears likely.

CPI-W.  The BLS reported that the narrower, seasonally-adjusted April CPI-W (CPI for Urban Wage Earners and Clerical Workers) declined by 0.02% (gained 0.34% unadjusted), following a 0.14% decline (a 0.25% unadjusted gain) in March.  Year-to-year inflation declined by 1.32% in April, following a 0.92% decline in March.

C-CPI-U.  Year-to-year or annual inflation for the Chain Weighted CPI-U — the fully substitution-based series that increasingly gets touted by CPI opponents and inflation apologists as the replacement for the CPI-U — fell by 1.06% in April, versus a 0.81% decline in March. 

Alternate Consumer Inflation Measures. Adjusted to pre-Clinton (1990) methodology, annual CPI growth eased to roughly 2.6% in April versus 2.9% in March, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, softened to roughly 6.7% (6.74% for those using the extra digit), versus 7.3% in March, and has been updated on the Alternate Data tab and Inflation Calculator at www.shadowstats.com.  The alternate 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 impact has not been formally published by the BLS.

Real Retail Sales.  Updating the May 13th Flash Update, inflation- and seasonally-adjusted April retail sales declined by 0.35% (down 0.37% before inflation adjustment) versus a revised March decline of 1.18% (previously down by 1.01%), against a 1.31% March decline before inflation adjustment. Year-to-year, April real retail sales fell by 9.54% (10.10% before inflation adjustment) versus a 9.18% decline in March (9.58% before inflation adjustment).

Reflecting benchmark revisions, the pace of annualized decline in the inflation-adjusted retail series widened in the first-quarter 2009 revision to 3.2% (previously 2.5%), which should have a negative impact on honest revisions to estimated first-quarter GDP growth. 

On a three-month moving-average basis, the April and March annual real declines were 8.91% and 8.72%, respectively. Along with the declines of the last several months, the April annual decline in the moving-average remains at the low for the two historical retail series of the post-World War II era.

Producer Price Index Rose Despite Rising Oil Prices. Rising energy prices were more than offset by the BLS’ seasonal adjustments in April. Nonetheless, the regularly-volatile, seasonally-adjusted producer price index (PPI) increased. For April, the PPI increased by 0.3% (up by 0.6% unadjusted), after falling by 1.2% (0.7% before seasonal adjustment) in March. The BLS data showed April’s year-to-year PPI inflation contracted by 3.7%, versus a 3.5% decline in March, the fifth month of formal PPI deflation (year-to-year price decline).

On a monthly basis, seasonally-adjusted April intermediate goods fell by 0.5% (down by 1.5% in March), but crude goods rose by 3.0% (down by 0.3% in March). The decline in year-to-year inflation continued, with April intermediate goods down 10.5% (down by 8.9% in March) and April crude goods down by 40.0% (down by 39.0% in March).

Industrial Production Is in Depression. The Federal Reserve reported that seasonally-adjusted April industrial production fell by 0.5% (down 0.3% net of revisions) for the month, after a revised 1.7% (previously 1.5%) decline in March.  The year-to-year decline in activity held at 12.5% for April, versus 12.5% (previously 12.8%) decline in March. Such remained the weakest showing for the series since war-time production was shut down after World War II.

With annual change down 12.5% and with a peak-to-trough (April is the short-lived current trough) contraction at 16.0%, the industrial sector of the economy (including manufacturing, mining and utilities) is in a depression. A depression is defined (SGS) as a recession where the peak-to-trough economic contraction exceeds 10%.

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