Dire Implications for U.S. Markets, U.S. Budget Deficit

Annual CPI-U Surges to 5.0% (SGS 12.6%)

"Core" Inflation Numbers Not Believable

Retail Sales and Industrial Production in Sharp Quarterly Contractions

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PLEASE NOTE: The SGS-Alternate CPI for June will be posted today on the Alternate Data tab of www.shadowstats.com. The pending full newsletter will follow in due course updated with all the latest data releases. All postings will be advised by e-mail.

– Best wishes to all, John Williams

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Inflationary Recession Implications Should Start to Roil Markets. Reporting of the last couple of days should result in mounting market recognition of an intensifying inflationary recession and of the resulting unhappy implications for the broad financial markets. One area in particular that is likely to receive more intense analysis is the federal government’s fiscal condition. 

The federal budget deficit should increase well beyond expectations in the current and next fiscal years, thanks to the deepening recession and rapidly increasing inflation, factors that are not reflected in the government’s underlying assumptions for its budget estimates. Such will mean increases in Treasury borrowings well beyond what already is expected, with likely negative pressures on the credit markets and the U.S. dollar. This is separate of any consideration of mounting financial system bailout efforts or talk of further tax rebates. 

Consumer inflation surged to 17-year high annual rate of 5.0% in June, as measured by the CPI-U all-urban-consumers measure. Even worse, for the narrower CPI-W — targeted at the narrower wage-earners category where gasoline takes a bigger proportional bite out of spending — annual inflation jumped to 5.6%. The measure used for making the annual cost of living adjustments to Social Security payments is the CPI-W, and the 2009 adjustment that will be based on the July to September 2008 period now is a good bet to top 5%, more than double last year’s 2.3% adjustment for 2008.

Although annual SGS-Alternate M3 growth has stalled just shy of 16%, such still is highly inflationary, and likely new liquidity moves by the Fed/Treasury should spike annual growth further in the months ahead. In conjunction with high oil prices and renewed weakening in the dollar, the rapid money expansion suggests double-digit inflation — as officially reported in the CPI — by early 2009.

On the recession front, real (inflation-adjusted) second-quarter retail sales contracted for the fourth consecutive quarter, while second-quarter industrial production showed a sharp quarterly contraction. In conjunction with consecutive quarterly contractions in payroll employments, these numbers should remove any doubt of the economy being in recession. Whether or not such is reflected in upcoming GDP revisions and reports, tax revenues will fall off sharply, again intensifying the government’s fiscal problems.

Inflation Explosion Likely to Continue. The Bureau of Labor Statistics (BLS) reported that the seasonally-adjusted June CPI-U gained 1.06% (1.01% unadjusted) +/- 0.12% for the month, versus the 0.65% (0.84% unadjusted) gain in May. Year-to-year or annual inflation in June jumped to 5.02% from 4.18% in May. Annual inflation will continue its upturn in July 2008 reporting, dependent on the seasonally-adjusted monthly gain exceeding the 0.22% monthly increase seen in July 2007, which appears highly likely. The difference would directly add to or subtract from June’s annual inflation rate of 5.02%.

The adjusted monthly inflation gain reflected negligible catch-up from the underreporting of energy-related inflation in recent months; such should intensify some in the next report. The lack of significant pick-up in the gimmicked concept of "core" inflation is beyond belief and is addressed in the pending newsletter.

Annual inflation for the Chain Weighted CPI-U (C-CPI-U) — the fully substitution-based series that increasingly gets touted by CPI opponents and inflation apologists as the replacement for the CPI-U — jumped to 4.24% in June, up from 3.62% in May.

Adjusted to pre-Clinton (1990) methodology, annual CPI growth rose to roughly 8.3% from 7.5% in May, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to a 27-year high of roughly 12.6% in June, up from 11.8% in May. The alternate numbers are not adjusted for any near-term manipulations of the data.

Real (Inflation-Adjusted) Retail Sales Fell Monthly, Quarterly and Annually. Based on June CPI-U inflation, the 0.1% monthly gain reported for June retail sales was a 1.0% contraction after inflation adjustment. Despite the positive impact of tax-rebate checks, real second-quarter retail sales contracted for the fourth consecutive quarter, at an annualized 1.1% pace, following a 3.4% drop in the first quarter. Real June retail sales were down year-to-year by 1.8%, versus a 1.9% decline in May).  

Industrial Production Down Sharply for Quarter. As reported by the Federal Reserve, monthly seasonally-adjusted June industrial production rose by 0.5% (0.7% net of revisions that stretched back over six months). Such followed an unrevised 0.2% decline in May. The monthly gain was attributed to surging auto production following the end of a strike.

Despite the revisions erasing the annualized 0.1% quarterly contraction previously reported for the fourth quarter (now up by 0.5%), the second quarter was reported with an annualized 3.1% contraction. Year-to-year growth was 0.3% in June, up from a revised 0.2% gain (was a 0.1% contraction) in May. Year-to-year change in the second quarter dropped sharply to 0.3% from 1.8% in the first quarter.

These reports will be discussed in greater detail in the pending newsletter.

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