JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

May 12, 2008

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M3 Growth Slowed in April — Still at 1971 High

March Trade Deficit "Improvement" Not Credible

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Please Note: The SGS-Ongoing M3 table and graph will be updated later today. Due to travel, the usual April retail sales and CPI updates will be combined and posted late Wednesday (May 14th), following the CPI release.
 – Best wishes to all, John Williams

Slowing M3 Growth May Signal Deteriorating Bank Solvency Circumstance

A deteriorating inflationary recession remains in place, as should be seen in various reporting due later this week. Separately, aside from continued sharply negative anecdotal evidence, other signals of ongoing banking system solvency issues have surfaced. The general outlook is unchanged.

Dip in M3 Growth Rate for April. Based on four weeks of data, the annual growth in April’s seasonally-adjusted monthly average SGS-Ongoing M3 estimate appears to have slowed to roughly 16.4% from 17.4% in March. Such was dominated by annual M2 growth slowing to 6.5% in April, from 7.0% in March, with annual M1 change turning negative by 0.8% in April after a 0.2% gain in March.

Though off the recent historic high growth rate, the current M3 growth remains at the historic high seen before the current period, in June 1971, two months before President Nixon closed the gold window and instituted wage and price controls. The current upside inflation pressures from excessive money growth remain in place.

The last slowing seen in the annual M3 growth rate was in December 2007, when the intensifying banking crisis led to the Fed’s introduction of the Term Auction Facility (TAF) at its discount window. The lending from the TAF was key to the ensuing surge in M3 growth.

There may be similar dynamics at work in the current circumstance, where the Fed found it necessary to expand the TAF from $100 billion to $150 billion, as announced May 2nd. If such is the case, some pickup in broad money growth should be evident in the numbers as they get reported for the current period.

Trade Deficit "Improvement" Will Help GDP Reporting. As of February reporting, the monthly trade balance data suggested an overall deterioration for the first-quarter 2008 net export account in the GDP. The unlikely growth reported for first-quarter GDP, instead, was helped by a reported improvement in net exports.

The just released seasonally-adjusted monthly trade deficit for March was reported to have narrowed to $58.2 billion, from a revised $61.7 billion (previously $62.3 billion) and accordingly will help support a possible upside revision the first-quarter GDP estimate. These data remain far from reliable and may be undergoing some massaging in support of likely rigged GDP numbers.

At least two factors appeared out of whack in the data. First were the prior month’s revisions, which were unusually large from a carryover standpoint. Carryover reflects irregularities in paperwork flows out of the ports to the Commerce Department. Carryover games were used in an outright manipulation of the trade numbers back in 1987 and 1988 in successful efforts to affect U.S. dollar trading (see the Primer Series on www.shadowstats.com). Second were oil imports. Although the average price of imported oil rose from a reported $84.76 per barrel in February to $89.85 in March, the average number of barrels per day imported in March 2008 was 8.986 million, down from 10.460 million in March 2007, where January and February 2008 daily volumes were up from 2007. Such suggests that there may further carryover problems in the works.

Week Ahead. Shy of manipulations, tomorrow’s (Tuesday, May 13th) April retail sales report should continue showing recessionary patterns with monthly and annual contractions, after inflation adjustment. Market expectations seem to favor no change for the month, although underlying fundamentals favor an outright contraction. Expectations are in line with underlying fundamentals for an outright contraction in the April industrial production report (Thursday, May 15th).

Any difference in the change in seasonally-adjusted April 2008 CPI (due Wednesday, May 14th), versus the April 2007 monthly gain of 0.32%, will directly add to or subtract from the March 2008 annual CPI inflation reading of 3.98%. Given current Fed sensitivities, a near-consensus report is likely, although underlying fundamentals would suggest a fairly significant upside surprise.

Full details on the various economic reporting will be covered in the next 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 May 26th, with intervening Flash Updates and Alerts posted as needed. All postings will be advised by e-mail.