FLASH UPDATE - June 30, 2008

 

 

 

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

 

FLASH UPDATE

 

June 30, 2008

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Abysmal Business Data Continue

Unprecedented Plunges in Consumer Confidence Measures

Good Time for the Rest of the World to Dump the Dollar

 

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Beyond gimmicked GDP reporting, most economic data have been consistent with severe economic contraction. The continued spike in oil prices has reached a level that could threaten systemic stability, and the financial markets have started to reflect same. The broad, general outlook is unchanged.

Oil, Inflation and the Dollar. Overhanging the markets for a number of years has been the question as to when the major holders of excess U.S. dollars in the global financial system might look to dump those holdings. An opportunity for that dumping is at hand. Most central banks know that their unwanted dollar hoards are going to generate long-term losses, but the oil markets have opened up an opportunity to mitigate some of those losses. For the rest of the world, dollar dumping now would reduce inflation risks outside the United States.

With oil trading above $140 per barrel, serious inflation consequences are in store for those economies that have been propping the greenback against their own domestic currencies, either by not selling unwanted dollar holdings or by intervening in the markets to maintain the dollar’s market value. From a perspective outside the United States, an offset to oil-price-based inflation risk is available in dollar depreciation, which reduces the cost of oil in the currency of the purchasing country. The effects of a declining dollar, however, do tend to spike dollar-based oil prices further, but not fully, in something of a self-feeding cycle.

The system, though, tends to be self-correcting. The current oil price problem in many ways is a dollar problem — tied to the weakness of the U.S. currency. At some point, oil producers likely will be forced to abandon oil pricing based in U.S. dollars. The broad effect of that would be an intensified inflation spike in the United States, with the energy-inflation impact much mitigated in the non-U.S. dollar world,

The current circumstance results from years of deliberate debasement and neglect of the U.S. currency by the political miscreants in that former malarial swamp on the Potomac. Contrary to the popular policies of political gratification of the moment — seen for a number of administrations and various Fed chairmen — the dollar does matter, and so does the budget deficit. The dollar issues are coming to a head. The deficit issues are related but still are smoldering in the background.       

FOMC: No Inflationary Recession Here. Rehashing the basics, the primary driver of current Federal Reserve activity and policy is preventing the collapse of the U.S. financial system. All other concerns — specifically inflation and recession — are secondary or tertiary (see dollar comments below). Discussion of prospects for stable economic growth and contained inflation in the June 25th FOMC statement was nothing but window dressing for use by Wall Street shills in selling the Fed’s near-term cessation of cutting interest rates.

As to the economy, the FOMC declared, "Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending." The references there were to the gimmicked positive growth in first-quarter GDP and to the recent gain reported in monthly retail sales, which largely could be attributed to the impact of the one-time tax rebate checks working their way through the system (see Disposable Income comments below). The annual contraction in inflation-adjusted retail sales nonetheless is deepening, and the effects of the tax rebates will prove to be extremely short-lived.

The FOMC continued, "The Committee expects inflation to moderate later this year and next year." Few competent and honest economists would back either the summary economic or inflation outlooks proffered by the Fed.

Of significant (secondary with the potential of moving into a co-primary category) concern to the Fed is the value of the U.S. Dollar. If selling of the greenback intensifies sharply, the effects on the domestic financial system and markets could be severely negative. The influx of foreign capital enjoyed by the U.S. markets in recent years has kept the domestic system flush with liquidity, funding Treasury debt issuance as well as a significant portion of new corporate capital needs.

A reversal of those flows would drain liquidity from the system. Such would have the potential of crashing the various U.S. markets, if the Fed did not move otherwise to re-liquefy the system. Messrs Bernanke and Paulson continue to have a serious interest in major holders of the U.S. dollar not dumping same. Recent criticism of Fed policy by certain major dollar holders are rumored to have forced the recent shift in Fed policy, but the continued spike in oil prices may be close to pushing the system out of control, as discussed earlier.

First-Quarter GNP Growth revised to 0.2% from 1.1%. In line with market expectations, the "final" estimate revision to annualized real (inflation-adjusted) first-quarter 2008 growth in gross domestic product (GDP) came in at 0.96% +/- 3%, versus the preliminary estimate of 0.90% and "final" fourth-quarter growth of 0.58%. Year-to-year change for the first quarter was 2.55%, versus 2.53% in the prior estimate and against 2.46% in the fourth quarter. The revisions were little more than statistical noise.

Suggesting sharp deterioration in data related to the net-debtor status of the United States, however, the estimated annualized first-quarter growth in gross national product (GNP) revised to 0.18% from the initial estimate of 1.08%, and versus reported fourth-quarter growth of 1.87%. GNP is the broadest measure of the economy, that is GDP plus the trade balance in factor income (interest and dividend payments).

Annualized growth in gross domestic income (GDI), the income-side theoretical equivalent to the consumption-side GDP, revised to 0.48% from the first estimate of 0.33%, versus a 0.19% contraction in the fourth quarter. The statistical discrepancy between the nominal GDP and GDP narrowed to $130 billion from $133 billion in the first estimate.

All the             national income data are subject to annual revisions from first-quarter 2005 to date. The revision is scheduled for release by the Bureau of Economic Analysis on July 31st. Such will be discussed in the upcoming newsletter.

May Disposable Income Jumped by $577 Billion! That was thanks to $48 billion in tax rebate checks. The program to rebate a total of $107 billion to taxpayers is scheduled to run though mid-July. If any of the monthly numbers seem off in the reported income data, such is due to the annualization of monthly numbers, which include some features — such as one-time tax rebates — that really should not be annualized.

Durable Goods Orders Continued to Sink Year-to-Year. The usually volatile news orders for durable goods series was on the plus-side of unchanged in May, per the Census Bureau. The seasonally adjusted numbers showed an official 0.0% (down 0.4% net of revisions) change, following a revised 1.0% (was 0.5%) monthly decline in April. Year-to-year, May orders fell by 2.8%, following a 1.8% annual decline in April activity. These declining annual growth patterns generally are not seen outside of recessions.

Consumer Confidence Contractions at Historic Nadirs. Despite tax rebates, the June consumer confidence measures continued to tank, with both the Conference Board and Michigan numbers showing the sharpest annual plunges in the 40- to 50-year histories of the respective series. The Conference Board’s June Confidence measure fell by 13.3% for the month and by a record 52.1% year-to-year, versus respective monthly and annual contractions in May of 7.5% and 46.5%. The Reuters/University of Michigan’s June Sentiment measure fell by 5.7% for the month and by a record 33.9% year-to-year, versus respective monthly and annual contractions in May of 4.5% and 32.3%.

Although these tend to be lagging, not leading indicators, they do not bode well for near-term retail sales activity or for conditions in the housing market.

Home Sales Remain Troubled. On the heels of last week’s negative housing starts report, seasonally-adjusted May home sales fell by 2.5% (2.7% net of revisions) for the month and by 40.3% year-to-year. Such compared with a 4.8% (previously 3.3%) monthly increase and a 42.1% (previously 42.0%) annual decline in April, per the Census Bureau.

The National Association of Realtors reported that seasonally-adjusted existing home sales for May rose by 2.0% for the month but fell 15.9% year-to-year. In April, sales reportedly eased by 1.0% for the month and by 17.5% year-to-year. This series includes reporting of a rising but undetermined number of home foreclosures.

Week Ahead. The big release in this holiday-shortened week is Thursday’s (July 3rd) June employment/unemployment report. Consensus forecasts appear to be holding around a 50,000 payroll loss (49,000 monthly loss reported for May), with some reduction in the unemployment rate. Pressures from a harried Fed would tend to favor reporting of consensus-or-better results, while underlying reality and better-quality indicators suggest general ongoing deterioration, with a greater than 100,000-plus jobs loss likely. The unemployment rate surge last month (adjusted U-3 jumped from 5.0% to 5.5%) may have reflected regular problems with seasonally adjusting the school year. If such were the case, the unemployment rate could ease back some, otherwise, unemployment should deteriorate as well.

Barring large revisions and assuming some consistency in the seasonally-adjusted and unadjusted annual change in payrolls — both very big "ifs" — year-to-year change in payrolls has a shot of turning negative in June, with any statistically-significant jobs decline of 130,000 or more. While the first such annual decline of this recession may still be off another month or two in reporting (currently-reported, seasonally-adjusted May 2008 payrolls of 137,754,000 are less than August 2007’s 137,756,000 and September’s 137,837,000), it is near. Annual payroll levels do not contract outside of recessions.

In other reporting, the ISM’s purchasing managers survey (manufacturing), due tomorrow (Tuesday, July 1st), should continuing showing a contracting manufacturing sector in conjunction with surging inflationary pressures. The ISM services measure (due Thursday, July 3rd) has significance primarily in its inflation and employment indicators, which should be relatively strong and weak.

Broad Outlook Remains Unchanged as Near-Term Market Stability Waivers. All factors considered, the broad outlook remains for an intensifying inflationary recession and deepening systemic and banking solvency crisis. Near-term market recognition of same and risks for unstable market conditions, however, appear to be intensifying.

Over the shorter term, any major market displacements likely will follow or be accompanied by intense, broad selling of the U.S. dollar. An increasing flight to safety outside of the U.S. dollar also should include flight to safety in gold. The gold and currency markets remain subject to extreme near-term volatility and both covert and overt central bank intervention. Over the longer term, U.S. equities, bonds and the greenback should suffer terribly, while gold and silver prices should boom. Full details will be covered in the next newsletter.

 

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Publication of the next regular newsletter should follow the upcoming Fourth of July weekend, with final market data for second-quarter 2008 as well as results of the June employment report. A Flash Update will follow the employment release, and other intervening Flash Updates and Alerts will be posted as needed. All postings will be advised by e-mail.

–Best wishes to all, John Williams