FLASH UPDATE

Outright Recession Reporting Unlikely for 4th-Quarter GDP or January Jobs

Inflation and Dollar Concerns Ignored by Fed

PLEASE NOTE: In order to cover the GDP and employment (including benchmark revisions) reports, the January SGS newsletter has been targeted for posting next Monday, February 4th.
– Best wishes to all, John Williams

The troubled markets of last week reflect the still early stages of a deepening, systemic solvency and liquidity crisis, in conjunction with a deteriorating inflationary recession. Such is implicit not only in the Fed’s panicked interest rate cut last Tuesday (January 22nd) and a subsequent cut that widely is expected out of the Federal Open Market Committee’s regular meeting ending this Wednesday (January 30th), but also by the Administration and Congress’s rapid movement in setting up a gimmicked economic stimulus package. Increasingly ignored are downside implications for the value of the U.S. dollar and upside pressures on U.S. inflation, both of which promise to roil the markets, going forward.

Pocketbook issues tend to dominate voter concerns, and exit polling in the South Carolina primary highlighted the economy as the major issue. Such polling results rarely are seen outside of recessions and run in tandem with the Federal Reserve and the federal government tacitly accepting an in-place economic contraction. With an mounting number of Wall Street analysts openly admitting the possibility of a downturn, one could argue that there is an opportunity in the week ahead for the Administration to take a hit in its key rigged data, without taking much of a bigger political hit than already has been taken.

Both the "advance" estimate of fourth-quarter 2007 GDP growth, due on Wednesday (January 30th), and the January employment report, due on Friday (February 1st), can be brought in showing whatever results are desired by the Administration and/or the Fed. Yet, despite soft consensus expectations for both series, reported contractions in quarterly GDP and monthly payrolls, though reflective of underlying reality, are not likely. Reporting now of outright contractions would only fuel financial-market volatility and increase pressures for ever greater Fed and federal government actions, which otherwise would be counterproductive in efforts to stabilize the U.S. dollar, as discussed in recent writings. Further, the Administration likely still would prefer to avoid having a formal recession declaration from the National Bureau of Economic Research (NBER) before the 2008 election.

An "advance" estimate of GDP growth is more than 90% guesstimate by the Bureau of Economic Analysis (BEA), and the number crunchers there tend to target consensus forecasts. With expectations for annualized real (inflation-adjusted) fourth-quarter growth running around 1.2%, down from 4.9% in the third quarter, reported growth around 1.2% is a fair bet.

The January payroll numbers will include the annual benchmark revisions, which will lower reported payroll levels but will allow any level of monthly change desired by the Bureau of Labor Statistics (BLS). Expectations are for a monthly jobs gain of 60,000. A fair bet is that the monthly change will remain in positive territory; otherwise the NBER has its beginning month for formal recession recognition. The unemployment rate is expected to hold at 5.0%, but an upside move is a good possibility.

The pending results already are known by the Administration and the Fed, so look to comments in tonight’s State of the Union Address and Wednesday’s FOMC statement for indications of what lies ahead with these widely followed reports. In other reporting of this week, such as consumer confidence and the purchasing managers survey, look for results that will tend to confirm a deteriorating inflationary recession.

 Further details will follow in the January SGS newsletter.

The January SGS is targeted for posting by Monday, February 4th. An e-mail advice will be made of its and any intervening Flash Update/Alert postings