JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

 FLASH UPDATE

July 31, 2009

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GDP Shows Most Severe Recession Since Great Depression

Second-Quarter GDP Annual Contraction Was Worst Ever

Recession Is Not Ending

Annual Durable Goods Plunge Continued
In GreatDepressionTerritory

Broad Money Growth Still Slowing

Unemployment Skew Next Week?

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PLEASE NOTE: The GDP Special Report on the restated GDP and related accounts will follow within a day or so. The next Flash Update is planned for next Friday (August 7th), following release of the July employment/unemployment report. Any interim Flash Update or Alert would be published as dictated by developing economic or financial-market circumstances.

– Best wishes to all, John Williams

 Following is a brief summary of the "advance" estimate of second-quarter GDP released along with the grand-benchmark revision of the national income accounts (including the GDP) released this morning (July 31st) by the Bureau of Economic Analysis. A much more detailed analysis, accompanied by graphs, will follow shortly in a special report.

So as to simplify the language, here are definitions of key terms used:

• "Real" means growth has been adjusted for inflation.
• "Nominal" means growth or level has not been adjusted for inflation. This is the way a business normally records its revenues.
• "Quarterly growth," unless otherwise stated, is in terms of seasonally-adjusted, annualized quarter-to-quarter growth, i.e., the growth rate of one quarter over the prior quarter, raised to the fourth power.
• "Annual growth" refers to the year-to-year change of the referenced period versus the same period the year before.

GDP Benchmark Revisions Showed Weaker Recent Growth, New Upside Growth Biases, Lowered Inflation Rates. The benchmark revision was pretty much as expected, showing a much deeper and longer recession in place than previously had been reported. The GDP now more closely tracks the timing of the recession’s official December 2007 onset, as previously proclaimed by the National Bureau of Economic Research (NBER).

Now showing five of the last six quarters in quarterly contraction, the revised official real GDP quarterly growth rates (and prior estimates of growth) are: 1q08 was down 0.7% (previously up 0.9%); 2q08 was up 1.5% (previously up 2.8%); 3q08 was down 2.7% (previously down 0.5%); 4q08 was down 5.4% (previously down 6.3%); 1q09 was down 6.4% (previously down 5.5%); 2q09 was down 1.0% in its "advance" estimate.

In like manner, recent real annual growth now shows a steeper pattern of slowing/contracting growth: 3q07 (near-term peak) was up 2.7% (previously up 2.8%); 4q07 was up 2.5% (previously up 2.3%);1q08 was up 2.0% (previously up 2.5%); 2q08 was up 1.6% (previously up 2.1%); 3q08 was up 0.0% (previously up 0.8%); 4q08 was down 1.9% (previously down 0.9%); 1q09 was down 3.3% (previously down 2.5%); 2q09 was down 3.9% in its "advance" estimate.

As noted in the SGS Newsletter No. 51, July marks the 19th month of economic contraction, the longest downturn (based on NBER timing) since the first downleg of the Great Depression. The new string of quarterly GDP contractions, as well as the annual declines of 3.3% and 3.9%, respectively, in the first and second quarters of 2009, are the worst showings in the history of the quarterly GDP series, which goes back to 1947. There was a steeper annual real economic contraction in GDP (annual average series for 1946) reflecting the shutdown of war-time production following World War II, but such is not considered a normal business cycle, and it did not last as long as the current economic downturn has, so far.

As reflected in the better economic indicators (see the most recent newsletter), the recession is ongoing. The second-quarter GDP "improvement" was only in terms of relative quarter-to-quarter growth (1.0% contraction versus a 6.4% contraction in the first quarter), and was needed badly for political and financial-market hype. Keep in mind that this "advance" estimate is roughly 90% guesstimate (only two of three months of trade data are available, for example), and it is the most heavily politicized of the major economic series.

The relatively narrower quarterly contraction in the second quarter reflected the impact of greater weakness being thrown back into the first quarter, in revision, and the use of artificially reduced inflation. The implicit price deflator for the second quarter was 0.2% versus a revised 1.9% (was 2.8%) in the first quarter. The general deterioration in the recent numbers was despite general downside revisions to reported inflation and a general pattern of accelerating growth in revised nominal GDP levels versus prior levels, revisions that reflect the Pollyanna Creep of the latest methodological shifts in the GDP reporting. Details of this will be discussed the special report.

June New Orders for Durable Goods Showed No Signs of Pending Economic Rebound. The general pattern of downside revisions to prior reporting by the Census Bureau was an ongoing feature of the June numbers. The regularly-volatile new orders for durable goods fell by 2.5% (down 3.3% net of revisions) month-to-month, versus a revised 1.3% (was 1.8%) gain in May. In terms of year-to-year change, before any accounting for inflation, June’s new orders were down by 25.0%, following May’s revised annual decline of 25.3% (previously 24.5%). Adjusted for inflation the series would have shown even sharper contractions. Nominal year-to-year change in the series has been holding at a 25% decline, plus or minus a percent or two, since February, having pushed into great depression territory, per SGS definition of a greater than 25% peak-to-trough decline in economic activity. 

The widely followed new orders for nondefense capital goods fell anew in June, down 3.4% (down 4.8% net of revisions) on a month-to-month basis, following May’s downwardly revised monthly gain of 9.1% (was 10.0%). Year-to-year, June orders were down by 26.7%, versus a revised May annual decline of 29.6% (previously down by 28.6%).

These series are leading indicators to economic activity and signal no pending rebound.

July Broad Money Supply Growth Continues to Stall.  Based on data available so far for the month (somewhat shy of three weeks), the seasonally-adjusted SGS-Ongoing M3 estimate for July appears headed for a month-to-month decline, with annual growth slowing to below 5.5%, versus the 6.4% annual growth estimated for June. Such particularly reflects declining weekly levels of M2 and of institutional money funds. The continued slack in broad money growth continues to highlight an intensifying systemic solvency crisis and an intensifying downturn in economic activity (irrespective of any recovery mania generated by poor-quality GDP reporting.

In terms of the monetary base — the Fed’s primary tool, in theory, for affecting the money supply — year-to-year change eased minimally to 94.6% in the two-week period ended July 29th, down from 95.7% in the prior two-week period. The monetary base consists basically of currency in circulation plus bank reserves. Annual growth in required reserves, however, continued to rise, up by 53.2% in the latest period, versus 49.7% in the prior two-week period. These data are a week advanced on money supply reporting.

Week Ahead: July Employment and Unemployment.  Due for release next Friday (August 7th), the July employment and unemployment surveys are expected to show a respective monthly decline of 333,000 (versus a 467,000 drop in June), with unemployment rising to 9.6% from 9.5%, per Briefing.com. Underlying series would suggests significantly worse results, but unusual seasonal-factor distortions could bring a reported — albeit false — reported decline in the unemployment rate.

As discussed in SGS Newsletter No. 51, disrupted patterns of regular auto-industry shutdowns for model-year-change retooling terribly skewed seasonally-adjusted new claims for unemployment insurance, reducing levels to a point of triggering "economic recovery" hype. The worst of the distortions took place in the same week as the household (unemployment) survey, and the same seasonal-pattern distortions may play out in the July unemployment rate and could affect payroll employment to a lesser extent. If it does, look out for sharp negative movements in the August data.

Otherwise, underlying data are consistent with a monthly July jobs loss in excess of 600,000, and a further increase in the unemployment rate. The only new data of significance since the publication of the last newsletter was yesterday’s (July 30th) release of June newspaper help-wanted advertising (Conference Board), which held at its record-low reading of 10. June was down by 41.5% year-to-year on a three-month moving average basis, versus a 42.6% decline in May. Any meaningful change in the prospects for the July reporting of employment conditions will be advised by a separate Flash Update.

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