FLASH UPDATE - June 22, 2008

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

June 22, 2008

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Industrial Production Contracts Year-to-Year

Housing Starts in Steepest Annual Decline since Depths of 1990/1991 Recession

No Signs of Abatement in Inflationary Recession

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Key Data Show Behavior Never Seen Outside of Recessions

Last week’s May industrial production and housing starts showed recession — a deepening recession — while inflation pressures continued to mount. Those data also were consistent with a second-quarter GDP contraction, as they were for the otherwise gimmicked first-quarter GDP reporting.

On the inflation front, the May PPI surged somewhat in parallel with the prior week’s CPI report. Oil prices have remained high, despite official harrumphing by entities that really do not want to see much of a decline in oil prices.

Money growth — though somewhat soft on a week-to-week and month-to-month basis — showed the possibility (based on 9 of 30 days of reporting) of annual growth in June’s monthly average SGS-Ongoing M3 measure turning higher — possibly topping 16.0% — following 15.9% annual growth in May and 16.4% in April. June 2008 M3 is going against smaller monthly growth seen in June 2007.

The largest component of M3 is M2, and it is faltering. The near-term slowing in M2 growth (down at an annualized 5.7% pace in the last two weeks on a seasonally adjusted basis) may be an indication of resurgent difficulties in the banking solvency crisis, or it may be just an artifact of poor-quality seasonal adjustments (the adjusted numbers were up at an annualized 22.4% pace). Time will tell, but annual M3 growth remains at a level signaling surging monetary inflation in the second half of 2008, into 2009.

A Fed Pause? Nonetheless, with Mr. Bernanke spouting nonsense about the lessened risk of a serious recession (it already is in place) and taking the position of the new champion of the U.S. dollar and defender against inflation, the markets are expecting no change in the targeted Fed funds rate out of Tuesday’s FOMC meeting. Accordingly, such is the likely result.

Anecdotal evidence remains strong, however, of ongoing difficulties in the banking system. Thus, it is worth reiterating that the primary driver of Fed policy and activity remains the salvation and stability of the banking system. In the continuing banking solvency crisis, inflation and recession concerns remain secondary or tertiary matters for the Fed. The U.S. dollar usually is also of secondary concern, unless dumping of the greenback poses risk to domestic systemic liability. Such a crisis remains in the offing.

Under such circumstances, having the potential to influence the reporting of key headline economic data remains an extremely powerful and inexpensive tool for the Fed. 

Annual Contractions in Industrial Production Do Not Happen Outside of Recessions. As reported by the Federal Reserve, seasonally-adjusted industrial production fell by 0.2% in May, following an unrevised 0.7% monthly plunge in April. Year-to-year change turned negative in May, down by 0.1%, the first annual decline in this series for the current recession. Such followed a revised 0.1% (previously 0.2%) annual increase in April. Annual contractions in industrial production are not seen outside of recessions.

The latest reporting was consistent with the continued manufacturing contraction seen in the purchasing managers surveys and in the ongoing weakness in new orders for durable goods. It also virtually assures a second consecutive quarterly contraction in second-quarter production, an occurrence rarely seen outside of a recession. 

Housing Starts Sink Anew. The regularly-volatile, seasonally-adjusted housing starts measure fell by a statistically insignificant 3.3% (a 5.5% decline net of revisions) +/- 13% (95% confidence interval) for the month of May, and fell by 32.1% against the same measure a year ago, per the Census Bureau. Such followed a downwardly revised monthly gain in April of 2.0% (previously an 8.2% increase), with a year-to-year contraction of 32.2% (previously 30.6%).

On a three-month moving-average basis, the year-to-year contraction in housing starts has hit its lowest level so far in the current business cycle, down 32.7%. Such is the weakest showing for the series since the trough of the 1990/1991 recession. Current numbers suggest a sharp quarterly contraction for second-quarter 2008 housing, the fourth consecutive quarterly contraction in housing starts, and a performance not otherwise seen outside of formal recessions.

PPI Annual Inflation: Finished Goods 7.2%, Intermediate Goods 12.6%, Crude Goods 41.5%. Despite some pick-up in monthly producer price index (PPI) inflation, both food and energy prices were understated, once again, meaningfully. The seasonally-adjusted May PPI increased by 1.4% (1.6% unadjusted) for the month, with an annual gain of 7.2%, per the Bureau of Labor Statistics (BLS). Such followed a 0.2% (0.7% unadjusted) monthly gain in April, which had seen a 6.5% annual inflation rate. On a monthly basis, seasonally-adjusted May intermediate goods were up by 2.9% (0.9% April), crude goods up by 6.7% (3.2% April). Year-to-year inflation, however, has gotten a little hairy, with May intermediate goods up by 12.6% (10.5% April) and with crude goods up by 41.5% (34.3% April).

Week Ahead. The "final" estimate revision of annualized real (inflation-adjusted) GDP is due on Thursday (June 26th). The number, though, will be far from final, with a major benchmark revision due on June 27th. Consensus forecasts are for a minor upward revision in the growth rate. Revisions, this time, should be little more than statistical noise.

May’s new orders for durable goods (due Wednesday, June 25th) likely will continue to be volatile, but look for annual change to remain negative after adjustment for inflation.

Outlook Remains Unchanged. All factors considered, the broad general outlook remains for an intensifying inflationary recession and deepening banking solvency crisis. Over the long term, U.S. equities, bonds and the dollar should suffer terribly, while gold and silver prices should boom. Full details will be covered in the next newsletter.

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The U.S. economy remains in an intensifying inflationary recession, while the banking solvency issues fester. Continuing market turmoil, central-bank/government jawboning and intervention (particularly in the currency and gold markets), increasing economic data distortions and ongoing systemic shocks remain within the general outlook.

Publication of the next regular newsletter should be around the end of the month. Intervening Flash Updates and Alerts will be posted as needed. All postings will be advised by e-mail.

–Best wishes to all, John Williams