JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

 FLASH UPDATE

June 17, 2009

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May CPI-U Annual Deflation of 1.3%
Versus SGS-Alternate Estimate of 6.1% Inflation

Seasonal Adjustments Continue to Skew Inflation Reporting

May Annual Production Fell at Fastest Pace
Since Post-World War II Production Shutdown

May Annual Decline in Housing Starts Continued Record Fall-Off
Monthly Gain Lacked Statistical Significance

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PLEASE NOTE: The next Flash Update is planned for Thursday, June 25th, following the "final" estimate revision to first-quarter 2009 GDP. Any interim Flash Update or Alert would be published as dictated by developing economic or financial-market circumstances.

– Best wishes to all, John Williams

 

It’s Largely in the Seasonal Adjustments. The CPI-U through May 2009 has risen at an annualized 4.2% year-to-date, not adjusted for seasonality. Seasonally adjusted, the annualized inflation rate has been 1.5%. Seasonally adjusting inflation remains highly questionable. As noted previously, I never have favored the media’s emphasis on seasonally-adjusted consumer inflation (as opposed to the Bureau of Labor Statistics’ emphasis on the unadjusted series). The adjusted monthly results do not reflect common experience, such as out-of-pocket spending. For example, the Department of Energy reported that May gasoline prices rose by 10.2% from April. Ignoring the difference where BLS surveying concluded that gasoline prices were up 9.6% for the month, the BLS estimate translated into a 3.1% gain, after seasonal adjustment. 

This adjustment pattern, however, tends to washout in June and to reverse in July. Assuming upside pressure continues on gasoline prices for the next several months, which appears likely, seasonally-adjusted monthly CPI-U inflation will begin to pick up sharply in the next several months. 

Also, since February, oil prices have been rising at a higher percent rate of change than they were at the same time last year. Accordingly, the annual decline in the CPI-U should be near a bottom, despite the deepening downturn reported for the last two months.

Serious Inflation — Hyperinflation — Still Ahead. The Fed’s efforts at U.S. dollar debasement have been instrumental in recent dollar weakness, which in turn has contributed to the upside pressure on dollar-denominated oil prices. Irrespective of near-term currency market gyrations and central bank intervention, the dollar ultimately is headed much lower against the major currencies. Such helps to generate inflationary pressures in the United States that are not reflective of strong economic activity.

While the excessive growth in the monetary base (100%-plus year-to-year) only has begun to trickle slowly into the broader money measures, the flow can accelerate sharply and quickly. The weakening dollar and Fed activity aimed at dollar debasement have contributed to declining demand for U.S. Treasuries. With low fundamental investor demand for Treasury securities, the Fed increasingly will have to monetize U.S. Treasury borrowings, whether directly or by stealth (such as Federal Reserve largesse flowing to the Treasury through banks now obligated to and/or controlled by the government), despite official protestations to the contrary. The effect of such monetization flows directly into the money supply, where recipients of the resulting Treasury checks either cash them or put them on deposit in depository institutions. At the same time, there is no offset to the money supply from the funds flowing into the Treasury, because those funds are not coming out of private depository accounts or from bank reserves being used to support same.

As non-demand-driven inflation and money growth begin to pick-up, so too should the velocity of money (see Money Supply Special Report at www.shadowstats.com) and inflation. Risks never have been higher for the onset of a U.S. hyperinflation within a one-year period. While my timing forecast for such an event remains in the range of 2009 to 2014, given where we sit on the calendar, early 2010 looks increasingly dangerous.  

CPI-U.  After two monthly declines in the CPI-U, the Bureau of Labor Statistics (BLS) reported this morning (June 17th) that the seasonally-adjusted May CPI-U turned higher by 0.10% (up by 0.29% unadjusted) +/- 0.12% (95% confidence interval not seasonally adjusted) for the month, versus a decline of 0.02% (up by 0.25% unadjusted) in April. For the third month, unadjusted year-to-year inflation declined (formal deflation), down by 1.28% +/- 0.20% (95% confidence interval) in May, versus a 0.74% contraction in April. 

The reported May CPI-U year-to-year decline was largest since April 1950.  I estimate, however, that CPI reporting methods used in 1950 would generate a reported current inflation rate of roughly 6% (see Alternate 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 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%. Again with heavy upside pressure continuing on oil and gasoline prices, and general selling pressure remaining on the U.S. dollar, annual CPI-U should be nearing its trough for the current cycle, with accelerating upticks in annual inflation likely starting in the next month or two.

CPI-W.  The BLS reported that the narrower, seasonally-adjusted May CPI-W (CPI for Urban Wage Earners and Clerical Workers) rose by 0.13% (gained 0.41% unadjusted), following a 0.02% drop (gain of 0.34% unadjusted) in April.  Year-to-year, CPI-W inflation declined by 1.89% in May, following a 1.32% decline in April.

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 1.38% in May, versus a 1.06% decline in April. 

Alternate Consumer Inflation Measures. Adjusted to pre-Clinton (1990) methodology, annual CPI growth eased to roughly 2.0% in May, versus 2.6% in April, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, softened to roughly 6.1% (6.15% for those using the extra digit — there is a rounding difference here to the first decimal point), versus 6.7% in April. The numbers have 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 estimated impact has not been published by the BLS.

Real Retail Sales.  Updating the June 11th Flash Update, inflation- and seasonally-adjusted May retail sales increased by 0.36% (up by 0.46% before inflation adjustment) versus a revised 0.21% (previously 0.35%) decline in April (down 0.24% before inflation adjustment). Year-to-year, May real retail sales fell 8.63% (9.56% before inflation adjustment) versus a 9.43% decline in April (10.00% before inflation adjustment).

Smoothed for monthly volatility on a three-month moving-average basis, the May and April annual real declines were 9.05% and 8.85%, respectively. Since December 2008, annual decline in the moving average has held around 9%, a record low for the two historical retail series of the post-World War II era.

Oil Price Impact on Producer Price Index Also Muted by Seasonals. Rising wholesale energy prices were dampened again by BLS seasonal adjustments in May, as released yesterday (June 16th), with the regularly-volatile, seasonally-adjusted producer price index (PPI) rising just 0.2% (0.5% before seasonal adjustment) for the month. Such was against April’s monthly gain of 0.3% (up by 0.6% unadjusted). The BLS data showed an intensifying contraction in year-to-year PPI inflation, with May down by 5.0% versus a 3.7% annual decline in April.

On a monthly basis, seasonally-adjusted May intermediate goods rose by 0.3% (down by 0.5% in April), with crude goods up by 3.6% (up by 3.0% in April). The decline in year-to-year inflation intensified, with May intermediate goods down by 12.5% (down by 10.5% in April) and May crude goods down by 41.1% (down by 40.0% in April).

Depression in Industrial Production Deepened. The Federal Reserve reported that seasonally-adjusted May industrial production fell by 1.1% (down 1.3% net of revisions) for the month, after a revised 0.7% (previously 0.5%) decline in April.  Year-to-year contraction in activity deepened to 13.4% in May, from a revised 12.7% (was 12.5%) decline in April, and from a 12.5% decline in March. Such set a new record low for annual production growth since war-time production was shut down after World War II.

With annual change down 13.4% and with a peak-to-trough (May is the short-lived current trough) contraction at 14.8%, the industrial sector of the economy (including manufacturing, mining and utilities) is in depression. A depression is defined (SGS) as a recession where the peak-to-trough economic contraction exceeds 10%.

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.

Annual Housing Starts Decline Holding at Record 50%. Yesterday’s (June 16th) release of seasonally-adjusted housing starts by the Census Bureau continued to show no meaningful improvement in housing-market conditions.  The highly volatile series showed a statistically insignificant 17.2% (16.2% net of revisions) monthly gain +/-17.6% (95% confidence interval) in May, following a revised 12.9% (was 12.8%) decline in April.  Year-to-year, May housing starts fell by 45.2% +/- 7.3% (95% confidence interval), following April’s 54.6% drop.

Smoothing the series for the reporting volatility seen each month, the three-month moving-average for May was down year-to-year by 49.2% versus 49.9% in April. Since January, the annual decline on the three-month moving average has held between 49% and 50%, the weakest performance in the history of the series. 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 an 80.0% contraction, with January 2006 the peak, and the April 2009 reading a short-lived trough. On a moving-average basis, the peak-to-trough decline through the short-lived May 2009 trough is 76.6%.   

Week Ahead.  New Orders for Durable Goods. Due for release on Wednesday, June 24th, the regularly volatile new orders for durable goods series is not likely to show a statistically meaningful month-to-month change, but the year-to-year contraction likely will continue deep in depression/great depression territory.

Gross Domestic Production (GDP). The "final" estimate revision for first-quarter 2009 GDP (due on Thursday, June 25th) is a misnomer, since reporting on July 31st will revise the entire series (including first-quarter 2009) back to 1929. While annual and benchmark revisions to retail sales, industrial production and the trade balance all have suggested weaker first-quarter GDP growth than currently reported, major revisions likely will be seen only as part of next month’s benchmark process. Accordingly, any revisions next week should be little more than statistical noise.

 

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