Recession Is Ongoing. In a replay of a month-old speech, Federal Reserve Chairman Bernanke yesterday updated his outlook from an economy that was bottoming-out to one where the recession "very likely" was over. If you look at his broad comments, though, he was not touting a near-term economic recovery; rather he was looking for ongoing bottom-bouncing. For those talking recession shapes, Mr. Bernanke sounded like he is in the "L"-shaped camp. 

As contentions of a pending or ongoing economic rebound make their rounds in the popular media, there remains the issue of how personal consumption (more than 70% of the economy) can grow, when consumers do not have the financial ability to expand consumption (see the Consumer Liquidity Special Report of September 14th).

Consensus talk of positive growth in third-quarter GDP well may be disappointed. Even if the cash-for-clunkers program along with some excess inventory building pushes the heavily gimmicked number into positive territory, such would not necessarily signal a recession’s end. To the contrary positive GDP quarters are normal in a recession. In each of the last six recessions (back to the mid-1970s), including the current downturn, at least one positive GDP quarter was reported, followed by a negative one.

Separately, the likelihood of a severe double- or multiple- dip recession, as seen in the Great Depression and as seen in the early 1980s, has been discussed in earlier writings, including the Depression Special Report of August 1st.

A note on the different CPI measures: The CPI-U is the monthly headline inflation number and is the broadest in its coverage, representing the buying patterns of all urban consumers.  The CPI-W covers the more-narrow universe of urban wage earners and clerical workers and is used in determining cost of living adjustments in government programs such as Social Security. The C-CPI-U is an experimental measure, where the weighting of components is fully substitution based, and generally shows lower annual inflation than the CPI-U and CPI-W, which once had fixed weightings — so as to measure the cost of living of maintaining a constant standard of living — but now are quasi-substitution-based. The SGS alternative measures are attempts at adjusting the CPI-U inflation for the impact of changes to reporting methodologies in recent decades. 

CPI-U.  The BLS reported that the seasonally-adjusted August CPI-U (Consumer Price Index for All Urban Consumers) rose by 0.45% (up by 0.22% unadjusted) +/- 0.12% (95% confidence interval not seasonally adjusted) for the month, versus a flat reading (down by 0.16% unadjusted) in July. Seasonally-adjusted, the annualized rate of inflation for the three months ended August was 4.9%, up from 3.9% as of July.

Unadjusted year-to-year inflation turned less negative (formal deflation), down by 1.48% +/- 0.20% (95% confidence interval) in August, versus a 2.10% contraction in July.

If the BLS had included the clunker rebates in new car pricing, the seasonally-adjusted monthly CPI-U would have gained roughly 0.7% (instead of 0.4%), with annual inflation a negative 1.2% instead of minus 1.5%. 

Recent annual declines in CPI-U inflation have been the biggest since 1950. I estimate, however, that CPI reporting methods used in 1950 would generate a reported current inflation rate of roughly 6% (see Alternative Consumer Inflation Measures below).

Annual inflation would increase or decrease in September 2009 reporting, dependent on the seasonally-adjusted monthly change, versus the "flat" (0.04% increase) adjusted monthly change seen in September 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 August’s annual inflation rate of negative 1.48%. CPI-U annual inflation likely hit its trough for the current cycle in July 2009, with accelerating upticks in annual inflation likely to continue in the months ahead, particularly in October.

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.

CPI-W.  The BLS reported that the narrower, seasonally-adjusted August CPI-W (CPI for Urban Wage Earners and Clerical Workers) rose by 0.55% (up by 0.30% unadjusted), following a flat reading (a 0.31% unadjusted decline) in July.  Year-to-year, CPI-W inflation declined by 1.90% in August, following a 2.67% decline in July.

C-CPI-U.  Year-to-year or annual inflation for the Chain Weighted CPI-U — the fully substitution-based series that gets touted by CPI opponents and inflation apologists as the replacement for the CPI-U — fell by 1.48% in August, versus a 1.89% decline in July. The same-level C-CPI-U annual inflation rate versus the CPI-U suggests reporting problems within the various CPI series.  

Alternative Consumer Inflation Measures. Adjusted to pre-Clinton (1990) methodology, annual CPI growth rebounded to roughly 2.1% in August, versus 1.2% in July, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to about 6.0% (5.99% for those using the extra digit) in August, versus 5.4% in July. As discussed in the opening inflation comments, both alternative measures include an extra 0.28% adjustment to reflect pricing impact from the clunkers program (not included by the BLS) on reported inflation. Such will be updated and revised as necessary along with the next CPI reporting. See the Alternate Data tab and Inflation Calculator at www.shadowstats.com, for graphs and 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 SGS has estimated the impact, not otherwise published by the BLS.

Real Retail Sales.  Updating yesterday’s (September 15th) Flash Update, inflation- and seasonally-adjusted August retail sales rose by 1.9% (up 2.2% before inflation adjustment), while real growth net of the clunkers program was just 0.1% (up 0.9% before inflation adjustment). The seasonally-adjusted CPI-U used in deflation here was adjusted for the 0.28% clunkers pricing impact ignored by the BLS. In contrast, real July retail sales fell by 0.2% for the month (also down 0.2% before inflation adjustment). Year-to-year, August real retail sales fell by 4.2% (down by 5.9% ex-clunkers), while July real retail sales fell by a revised 6.7% (was 6.5%), which was an 8.5% contraction before inflation adjustment.

Smoothed for monthly volatility on a three-month moving-average basis, the August and July real annual declines were 6.2% and 7.8%, respectively. From December 2008 through June 2009, annual decline in the moving average had held around 9%, a record low for the two historical retail series of the post-World War II era. The pattern here of annual growth moving off its historically low level in recent months reflects bottom-bouncing of the series at a low level of activity compared with a period of rapid monthly decline the year before. The monthly level of real retail sales has been virtually flat for the last eight months, plus or minus 0.4%, including the impact of August’s spike from the clunkers program. There is no turnaround in economic activity evident here, just bottom-bouncing.

"Core" Retail Sales Methodology. The methodological changes in calculating the "core" retail sales number, discussed briefly in yesterday’s (September 14th) Flash Update will be detailed in the next update.

Industrial Production Boosted by Autos and Weather.  Contrary to my assessment of the weather, the Fed indicated that August was unseasonably warm, and that increased not only utility usage, but also reported industrial production that is indexed to same. Auto production, spiked by the cash-for-clunkers program, accounted for 25% of the reported production increase in August, having accounted for 70% of the production increase in July.

Overall, the Federal Reserve reported that seasonally-adjusted August industrial production rose by 0.8% (1.5% net of revisions) for the month, following a revised 1.0% (previously 0.5%) gain in July.  Year-to-year contraction in August narrowed to 10.8% from a revised 12.4% (previously 13.1%) contraction in July. June’s reading had set a record low for annual production growth since the shutdown of war-time production that followed World War II.   

The series generally is bottom-bouncing, with July and August running about 0.7% ahead of the second-quarter, but about 2.1% below the first-quarter. With a likely lack of follow-through gain for auto sales, September production should see some pull back.

With annual change down 10.8% and with a peak-to-trough (June remains the current trough) contraction at a revised 14.8% (was 14.6%), the industrial sector of the economy (including manufacturing, mining and utilities) continued in depression. A depression is defined (SGS) as a recession where the peak-to-trough economic contraction exceeds 10%.