FLASH UPDATE - October 30, 2008

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

October 30, 2008

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Gimmicked GDP Overstatement Continues, Despite Reported Contraction

GDP Inflation Hits 18-Year High

"Recession" Dates Back to 4th-Quarter 2006

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PLEASE NOTE: The following is a brief update on this morning’s "advance" estimate on third-quarter GDP growth. The full newsletter will follow over the weekend. The markets and the global financial system remain in a state of extreme flux, but the long-range outlook is unchanged.  
– Best wishes to all, John Williams

Narrower-Than-Expected GDP Contraction Is Nonsense.   The difference between the reported 0.3% annualized Gross Domestic Product (GDP) and the consensus expectation of a 0.5% contraction is no more than statistical noise, yet the reported result most certainly was manufactured so as to allow the hypesters on Wall Street and in Washington to spin their fairy tales of a "less-severe recession" in order to help draw the gullible back into stocks, at least for a day or two before next week’s election. This follows earlier economic scare tactics aimed at the public to help sell the "bailout" package.

The 0.3% contraction was a plug number, as its calculation included significant "guesstimates."   For example, the "advance" estimate is based on only two out of three highly volatile and suspect monthly trade reports. The Bureau of Economic Analysis (BEA) could have brought in the reported growth at a small plus, just easily as a small minus, but the credibility of ongoing GDP growth may have reached its limits and was abandoned publicly by the White House, last week. The reported "advance" growth estimate usually is massaged so as to come in close to consensus, in this case a little bit better. Keep in mind that the 0.25% contraction is an annualized rate, only 0.06% ($7.4 billion out of $11,720.0 billion) quarter-to-quarter, a magnitude well within the scope of regular monthly revisions and statistical noise.

With a 95% confidence interval of +/- 3% around this morning’s estimate of an annualized 0.25% contraction in real (inflation-adjusted), annualized quarterly third-quarter GDP growth, the number was not even statistically indistinguishable from growth or contraction in the 3% range. A quarterly contraction in excess of 2% would have been more realistic. With the sharp reversal, though, in current quarterly growth against the unbelievable annualized 4.8% quarterly growth reported for third-quarter 2007, year-to-year change slowed sharply. Year-to-year real GDP growth dropped to 0.81% in the latest quarter, from 2.05% in the second quarter. The SGS-Alternate GDP estimate (which will be updated on the Alternate-Data tab at www.shadowstats.com later today) is for an annual contraction of roughly 3.3% versus an annual (not annualized) contraction of 2.9% in the second quarter.

Against the heavy upside biases built into GDP reporting, the BEA had to allow an inflation surge in order to get real GDP into contraction. The GDP implicit price deflator (GDP inflation rate) exploded to an annualized 18-year high of 4.09%, versus the multiple-year low of 1.26% used to keep second-quarter GDP growth in positive territory (the lower the GDP inflation rate used, the higher the reported real growth).

U.S. Economy Is in a Severe Recession. With real retail sales, housing, nonfarm payrolls, new orders for durable goods and industrial production all showing quarterly and annual growth patterns never seen outside of a recession still in deterioration, GDP reporting eventually should show a string of quarterly contractions, with the recession dating back to fourth-quarter 2006, long before the exacerbation of the current systemic solvency crisis. As discussed in recent newsletters, official GDP surrogates such as Gross National Product (GNP) and Gross Domestic Income (GDI) have shown varying patterns of quarterly contractions. GDP is the theoretical equivalent of GDI (consumption side versus income side) and is GNP net of the trade balance in interest and dividend payments.

Based on existing GDP, GDI and GDP reporting, the following quarters have shown inflation-adjusted quarterly contractions: 1Q07 (GNP/GDI), 4Q07 (GDP/GDI), 1Q08 (GDI), 3Q08 (GDP). [This text has been corrected from the initial posting, where 1Q08 incorrectly was indicated as GDP.]

The broad nature of the ongoing structural downturn (including the double-dip nature of the 2000 recession) will be explored anew in the upcoming newsletter.

Consumer Confidence Tanked. Given the magnitude of recent market turmoil and economy-bashing out of Washington, there should have been no surprise that the Conference Board’s Consumer Confidence measure suffered the largest percentage declines, ever, on both a monthly and annual basis, with confidence falling to its lowest level, ever. Tomorrow’s (October 31st) Consumer Sentiment measure likely will not fare much better.

In other reporting, although the regularly-volatile new orders for durable goods reportedly rose by 0.8% in September, year-to-year change continued to decline in a recessionary pattern, down 2.4% from September 2007, versus August’s 8.9% annual decline. Annual patterns in housing activity generally remain deep in recession territory, irrespective of month-to-month reporting volatility. Issues with existing home sales reporting and included foreclosures data continue to mount.

More complete detail on the various series will follow in the full newsletter.

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