JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

May 29, 2008

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First-Quarter GDI Growth Near Outright Recession

Wall Street Spinmeisters Grasp for Straws as Business Contraction Intensifies

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The next regular newsletter should be published over the coming weekend. The SGS-Alternate GDP and monthly Financial-Weighted U.S. Dollar index also will be updated on the Alternate Data tab this weekend.
– Best wishes to all, John Williams

Market perceptions are being played very carefully by Wall Street’s spinmeisters, as seen in recent fluffy hype involving durable goods orders and new home sales. Ignoring the highly-touted but largely insignificant monthly changes seen in these regularly volatile series, the new orders reporting now has contracted year-to-year for two months straight, an occurrence rarely seen outside of deepening recession. New home sales also showed a deepening, severe annual decline, an occurrence never seen outside of an intensifying economic downturn. Despite the sales pitch being given to the markets that the U.S. economy dodged a recession bullet, only heavily biased series like GDP are showing results that run contrary to the underlying fundamentals. Better quality series continue to show a rapidly deteriorating inflationary recession.

This revised 0.9% annualized real (inflation-adjusted) gain for first-quarter GDP matched consensus forecasts, but the GDP series is the most heavily gimmicked and biased report put out by the federal government. At the same time, the GDI (Gross Domestic Income), which is the theoretical equivalent of the GDP (gross domestic product), was reported to have come within 0.09% quarterly change (not annualized) of showing two consecutive quarters of inflation-adjusted contraction, also known as a recession.

As to the broad picture, once again, underlying fundamentals have not changed, with the long-range outlooks for the U.S. dollar and gold, respectively, about as bearish and bullish as possible. The U.S. economy remains in a rapidly intensifying inflationary recession, while the ongoing banking system solvency/liquidity crisis continues to fester. The eventual implications for the U.S. equity and credit markets remain bleak.

Durable Goods Orders Continue Falling Year-to-Year. Despite the stock market’s heart palpitations over a "less-than-expected" decline, the highly volatile new orders for durable goods showed a deepening recession as of April. New orders fell by a seasonally-adjusted 0.5% (a gain of 1.0% net of revisions), following an unrevised monthly March decline of 0.3%. On a year-to-year basis, April’s new orders fell by 1.7%, versus a revised annual decline of 3.2% (previously a 4.2% drop) in March. Smoothed using a six-month moving average, annual growth (net of inflation) remained increasingly negative and an ongoing recession signal.

The closely followed nondefense capital goods new orders fell by 1.4% for the month of April, reversing the 1.4% (previously 1.5%) gain seen in March. April’s year-to-year change was a decline of 4.7%, following a revised 4.8% (previously 3.3%) drop in March.

Annual Home Sales Collapse Anew. Despite market excitement over a small monthly gain reported in April new home sales, the broad picture could not be much worse. Rebased with annual benchmark revisions, seasonally-adjusted April new home sales rose by 3.3% (unchanged net of revisions) +/- 14% (95% confidence interval), which was not statistically distinguishable from a contraction. The April gain followed a revised 11.0% (previously 8.5%) plunge in March. On a year-to-year basis, however, April new home sales fell at an accelerating annual pace of 42.0%, following a revised 38.2% (previously 36.6%) annual plunge in March.

Increasingly reflecting the impact of foreclosures, existing home sales in April eased by 1.0% (0.8% net of revisions), after a revised 1.8% (previously 2.0%) drop in March. Year-to-year sales fell by 17.5% in April, versus a 19.1% (previously 19.3%) decline in March. Both home sales series tend to confirm the ongoing recession reflected in recent housing starts reporting.

Consumer Confidence Plunges to Lows of 1990/1991 Recession. Consistent with slowing consumer activity evident in housing and retail sales, the Conference Board’s May Consumer Confidence plunged by 8.9% month-to-month, and by 47.3% year-to-year, showing the lowest level and deepest annual contraction seen since the 1990/1991 recession.

GDI Nears Official Recession Reporting. Reflecting the not credible drop reported in March oil imports, as discussed in the May 12th Flash Update, the Bureau of Economic Analysis (BEA) reported this morning’s "preliminary" estimate revision of annualized real (inflation-adjusted) growth rate for first-quarter 2008 GDP at 0.90% (previously 0.60%) +/- 3%, which remained statistically indistinguishable from a meaningful contraction. The new growth rate compares with 0.58% growth estimate for fourth-quarter 2007, and the 4.91% economic boom reported in the third quarter. Annual growth for the first quarter was revised to 2.53% (previously 2.46%) versus 2.46% in the fourth quarter and 2.84% in the third quarter.

The GDP’s first-quarter implicit price deflator (inflation measure) rose at an annualized rate of 2.57%, previously 2.58%, against 2.41% in the fourth quarter and a 1.03% rate in the third quarter.

Today’s report, however, also included the first estimate of first-quarter 2008 Gross Domestic Income (GDI), which is the theoretical income-side equivalent to the GDP’s consumption-side measure. It varies from GDP only by a "statistical discrepancy" account, which is used to balance GDP and GDI. Where the statistical discrepancy widened to a $132.9 billion in the first quarter, from a revised $112.1 (was $139.9 billion) in the fourth quarter, the difference indicated that the GDP was being overstated relative to the GDI.

Close to showing an outright recession, annualized real quarter-to-quarter GDI in the first quarter gained just 0.33%, following a revised annualized contraction of 0.19% (previously 0.98%) in the fourth quarter, and a 1.2% increase in the third quarter. Year-to-year growth slowed to 1.08% in the first quarter, versus 1.29% (previously 1.09%) in the fourth quarter.

Also reported today was the initial estimate of first-quarter 2008 Gross National Product (GNP), where GDP is GNP net of trade in factor income (interest and dividend payments). Annualized real quarter-to-quarter growth was reported at 1.08%, versus 1.87% in the fourth quarter and a 5.81% increase in third quarter. Year-to-year first-quarter growth was 3.17% versus 3.07% in the fourth quarter.

Adjusting for methodological distortions built into GDP reporting over time, the SGS-Alternate GDP measure suggests that economic reality is much weaker than officially reported. A first-quarter year-to-year contraction of roughly 2.7% would have been more in line with underlying fundamentals, past methodologies and the ongoing recession. Such reflects some bottom-bouncing with the annual contraction somewhat deeper than the 2.4% decline estimated for the fourth-quarter.

Full details on the various economic reporting will be covered in the pending newsletter.

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

Publication of the next regular newsletter should be over the coming weekend. Any intervening Flash Updates and Alerts will be posted as needed. All postings will be advised by e-mail.