FLASH UPDATE - August 28, 2008

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

August 28, 2008

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Gross Domestic Income (GDP Equivalent) Is in Formal Recession

New Orders for Durables Goods Sank Year-to-Year

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Best wishes to all for a most enjoyable Labor Day weekend. – John Williams

Real GDI Has Contracted for Two Consecutive Quarters. The nonsense continued with GDP reporting, today, with the "preliminary" estimate revision for the second quarter showing annualized real (inflation-adjusted) growth of 3.28% +/- 3%, up from the "advance" estimate of 1.89% and up from the first quarter’s 0.87%. Year-to-year growth revised to 2.17% from 1.82%, which still was down from the first quarter’s 2.54%.   The numbers reflected an equally unbelievable low second-quarter inflation rate for the GDP deflator of 1.33% (revised from 1.11%), versus 2.56% in the first quarter.  The revisions were dominated by highly questionable trade data.

This heavily propagandized series now shows near-average economic growth, despite signals of recession in nearly every other economic series, as discussed in the most recent newsletter.  

All news on the GDP front, however, was not so happy. The Gross Domestic Income (GDI) measure, which is the income-side equivalent (in theory equal, but rarely so in practice) to the consumption-side GDP measure, now is in recession. Deflated by the GDP inflation rate, revised GDI contracted at an annualized real rate of 0.8% in fourth-quarter 2007, contracted at an annualized 0.1% in first-quarter 2008, and grew at an annualized 0.5% in the second quarter. Annual growth slipped from 0.8% in the fourth quarter, to 0.7% in the first quarter, and to 0.3% in the second quarter. Traditionally, two consecutive quarterly contractions in GDP (the same for GDI) have constituted a formal recession. The GDI contracted in the fourth and first quarters.

New Orders for Durable Goods Tumble 4.5% Year/Year. As suggested in the Monday’s (August 25th) Flash Update, the seasonally-adjusted durable goods report is volatile on a random basis, but that the year-to-year change (before inflation) likely would remain in contraction, continuing its deepening recession signal. Accordingly, the reported 1.3% (1.8% net of revisions) monthly gain for the series in July was nothing more than statistical noise, following a revised 1.3% (previously 0.8%) gain in June. In terms of annual change before any adjustment for inflation, however, the series contracted for the fifth straight month, down 4.5% from July 2007, after a 0.7% (previously 1.3%) decline in June. Such a pattern never is seen outside of a recession.

The closely followed nondefense capital goods orders rose by 6.3% for the month of July, following a 2.6% decline in June, but this series, too, was down 5.2% year-to-year in July, following a 6.8% decline in June. 

General Outlook Remains Unchanged.Large price swings and high volatility are likely to continue for gold, as well as for the U.S. dollar and domestic equities. It remains unlikely that we have seen the near-term high in oil prices (a major hit by Gustav in the Gulf area could double gasoline 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 these issues and growing global political tensions intensify the risks for unstable market conditions.

Over the near-term, negative major market displacements likely will follow or be accompanied by intense, broad selling of the U.S. dollar.  An eventual, increasing flight-to-safety outside of the U.S. dollar also should include flight-to-safety into gold.  Despite recent relative softness in oil prices, current levels (anything above $90 per barrel) 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.

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The next SGS Newsletter is targeted for the week of September 8th, following the release of the August employment/unemployment report. The posting of the newsletter and all intervening Flash Updates and Alerts will be advised by e-mail.