JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

- The transcript of my prepared testimony before the House Committee on Financial Services on "Implications of a Weaker Dollar for Oil Prices and the U.S. Economy" has been posted to the web-site.
- Money Supply Special Report will be posted this week.
- Flash Update July 31, 2008 (tomorrow, Thursday) on the "advance" estimate of second-quarter GDP and the annual revisions to the series.
- Flash Update August 1, 2008 (Friday) on the July employment/unemployment report.
- Updated Alternate-Data series on GDP, Unemployment and the U.S. Dollar will be updated over the weekend (not separately advised).
- The regular, full SGS Newsletter will be posted next week.
– Best wishes to all, John Williams

Wall Street continues spinning that the economy is on the upswing, that a recession was dodged. The financial and economic propagandists have been grasping at straws and using "better-than-expected results" strategies in mitigating not only impaired corporate profit reports, but also ongoing, negative economic data. The game is to hype expectations to the downside and then to turn euphoric when terrible results beat expectations. On the economic data front, new orders for durables and consumer confidence are the latest series to be so used from an economic standpoint (see below). Nonetheless, a very clear inflationary recession is in place, despite any incredible — as in unbelievable — GDP reporting tomorrow.

The U.S. financial system remains at risk, and the Federal Reserve — with support from the Administration and Congress — will continue to do whatever is necessary, to spend whatever cash needs to be created, in order to keep the system from crashing. The Fed, the Administration and Congress have no choice. The bailouts of Fannie Mae and Freddie Mac were the biggest actions, so far. Bailouts will follow of the FDIC (and or/increasing insured account sizes) or any major banks or other financial services entities, as needed, where a failure would threaten a run on the system or a systemic collapse. This morning’s enhancement by the Federal Reserve of its emergency liquidity facilities emphasises the continuing nature of the still-intensifying banking solvency crisis. The monetary cost of ongoing, short-term systemic stability remains higher long-term inflation. Further detail follows in the upcoming newsletter.

Durable Goods Orders Sink Year-to-Year. The regularly volatile new orders for durable goods series was reported by the Census Bureau as up by 0.8% (0.8% net of revisions) for the month of June on a seasonally-adjusted basis. Such followed an upwardly revised 0.1% (previously unchanged) monthly gain in May. Minor fluctuations in monthly growth for this high volatile series are meaningless, especially against consensus estimates. What is of significance, however — and what follows is before any adjustment for inflation — is that series contracted on a year-to-year basis for the fourth straight month (down 0.8% March, down 3.8% April, down 1.4% May, down 1.1% June), and contracted year-to-year for the second quarter. The second quarter also was the third consecutive quarter-to-quarter contraction for the series, an event not seen historically outside of recessions.    

Annual Change in Consumer Confidence Sets Historic Record Low. Also volatile are the consumer confidence measures, where the Conference Board’s Consumer Confidence measure gained 1.8% in July (versus down 12.2% in June) and the Reuters/University of Michigan’s Consumer Sentiment measure rose by 8.5% in July (versus down 5.7% in June). Similar monthly patterns were seen last year, however, and of greater significance was the pattern of annual change.

Consumer Confidence in July fell by the largest annual amount in the history of the series, down by 53.6% year-to-year, breaking the prior month’s record annual contraction of 51.7%. July Consumer Sentiment fell by 32.3% year-to-year, the steepest annual contraction shy of June’s record 33.9% drop. These lagging, not leading indicators confirm that the economy has been in a deepening recession.  

Expectations Rise to 2.3% Second-Quarter GDP Growth. Consensus forecasts for the "advance" estimate of second-quarter 2008 annualized real growth (due July 31st, tomorrow) has risen from 1.8% a week ago, to 2.3%, per briefing.com. Any such growth likely would be seen in guesstimated components such as personal consumption services or business inventories, and/or in government spending and in an "improved" trade deficit, the likely largest single plus-factor.

The trade estimate will be based on two of three months of reporting of highly questionable trade deficit data. The last two months have shown a sudden surge in auto exports and collapsing oil imports, areas that do not tie into underlying anecdotal evidence, and where other series such as production and new orders do not support same on the export side. For example, while the purchasing managers manufacturing survey has shown increasing new export orders, for some time, the overall new orders measure is in contraction, suggesting that export gains are not more than offsetting lost domestic business activity.

Key series that show or suggest an ongoing and deepening recession, with data through the second quarter, include:

(1) Nonfarm Payrolls - two consecutive quarterly contractions with year-to-year change in contraction as of June.
(2) Industrial Production - current quarterly contraction and near-zero year-to-year growth.
(3) New Orders for Durable Goods - three consecutive quarterly contractions and current-quarter year-to-year contraction in nominal terms (not adjusted for inflation), with worse results net of inflation.
(4) Purchasing Mangers Manufacturing New Orders - two consecutive quarterly contractions.
(5) Retail Sales - four consecutive quarterly contractions and two consecutive quarters of year-to-year contraction.

Such activity in any of those areas is not seen outside of formal recessions.

Benchmark Revision Cautions. Keep in mind that tomorrow’s GDP release will include annual revisions back to first-quarter 2005. While historical GDP likely will be weaker in revision, the "advance" estimate usually is targeted against consensus forecasts, which, again, are running near 2.3%.

July Employment Report. Consensus expectations continue at roughly a 70,000 monthly decline for July payrolls and a small increase in the unemployment rate. The report is due for release on August 1st (Friday). While jobless claims, help-wanted advertising and the purchasing managers surveys all suggest a monthly employment contraction in excess of 100,000, something close to or slightly better than consensus estimates likely would be preferred by the Fed. Shy of unexpected surging jobs growth, a deepening year-to-year decline in payrolls could be a headline grabber.  

General Outlook Unchanged. Large price swings with high volatility have been seen in recent weeks for oil and gold prices, as well as for the U.S. dollar and domestic equities. It is not likely that we have seen the near-term high in oil prices, and neither has gold topped nor the dollar bottomed. All factors considered, the broad outlook remains the same: further intensification of the inflationary recession and a deepening systemic and banking solvency crisis. Near-term market recognition of the issues and risks for unstable market conditions are intensifying, albeit erratically.

Over the shorter term, negative 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 into gold. Despite the ongoing volatility in oil prices, current levels remain highly inflationary. The gold and currency markets also remain subject to extreme near-term volatility, jawboning 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.