JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

April 23, 2008

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Is The First-Quarter GDP Fix In?

Oil Prices Cannot Double Without Serious Consequences

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Please Note: In response to the recent, intensified surge in oil prices, the Reporting/Market Focus in the pending SGS Newsletter will review the historical relationship between oil prices and inflation, business activity and the financial markets. As a result, new research and analysis have pushed the posting of the next newsletter to over the coming weekend, likely on Monday, April 28th.
– Best wishes to all, John Williams

Reality of Inflation Reporting Deteriorates Markedly

No Recession!?! When President Bush declares, "We’re not in a recession, we’re in a slowdown [Reuters, April 22]," it is almost a sure bet that the "advance" estimate of first-quarter GDP growth — due for release next Wednesday (April 30th) — will not show a contraction. By law, neither the White House nor the Fed is supposed to get an advance look at the GDP data until after the markets close on April 29th, but political practicality prevents the President or the Fed chairman from being embarrassed by data surprises. Those data surprises most certainly never occur when the numbers are being massaged to meet political or financial-market needs. In any event, the Bureau of Economic Analysis (BEA) already has a pretty good idea of what it will be reporting.

As will be shown in the upcoming newsletter, for first-quarter 2008, there is solid evidence of a strong quarter-to-quarter contraction in inflation-adjusted personal consumption and residential construction, which account for roughly 75% of GDP. Business investment (about 12% of GDP) also appears to have contracted in the quarter. That leaves open the potential offsetting economic gains in government consumption, inventory build-up and or improvement in the trade deficit (which actually appears to have deteriorated in the first quarter) to generate positive GDP growth. Whatever gimmicks are used, artificially-low inflation likely will be involved (despite reported first-quarter CPI rising at an annualized 4.3%). Where the GDP growth rate is reported net of inflation, deflating the nominal numbers by a too-low inflation rate results in a too-high real (inflation-adjusted) growth rate.

For fourth-quarter 2007 GDP, annualized real growth was 0.6%. What was remarkable about that number — given that the first report is 90%-plus a guesstimate — is that not only did the "advance" estimate match consensus forecasts exactly, but also that the two subsequent revisions also held at 0.6%. Despite the consensus usually missing the mark on economic data, the BEA tries to target the consensus number in its reporting, at least in its first or "advance" quarterly GDP estimate. Also, subsequent revisions usually are relatively large, as better underlying data become available.

Consensus forecasts for the first-quarter’s annualized GDP growth rate currently are around 0.4%. If the BEA confirms the consensus forecasters’ prescience, once again, such would show a 95% confidence interval around that 0.4% gain of roughly +/- 3%. Such a gain — as with the fourth-quarter’s GDP growth rate — would not be statistically distinguishable from a contraction.    

Unfortunately, the GDP series has been so gutted of reporting integrity over time that it remains little but political propaganda. If the GDP growth rate remains positive in the first quarter, the spinmeisters on Wall Street will have a good time explaining how the economy dodged a bullet.

Oil Prices Nearly Have Doubled in Last Year. With crude oil pushing $120 per barrel, prices are up more than 90% from a year ago. Such means significantly higher consumer inflation over the next six months and intensified selling pressure on the U.S. dollar. Given limits on consumers’ disposable income and constraints on further consumer debt expansion, rising inflation should be reflected in weaker real economic activity (as in a GDP contraction). The environment and underlying fundamentals remain highly bullish for gold, and it is hard to believe that the real-world implications of what is happening will not have some negative impact on Wall Street.

While the oil market remains highly volatile, the long-term trend in oil prices should remain strongly to the upside, despite any near-term profit taking. Some of the likely effects of the current circumstance will be quantified in the upcoming newsletter.

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Continuing market turmoil, central-bank/government intervention, particularly in the currency and gold markets, and ongoing systemic shocks remain within the general outlook, which is unchanged.

Publication of the next regular newsletter is targeted for around Monday, April 28th, with any intervening Flash Updates and Alerts posted as needed. All postings will be