Recent Economic Growth Overstatements Evident
In Post-Election Revisions

Retail Sales Series Signals Worse Times Ahead

November Inflation to Take Heavy Oil-Related Hit

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PLEASE NOTE: The U.S. Treasury is scheduled to publish its generally accepted accounting principles (GAAP) based financial statements on the U.S. government sometime on Monday (December 15th). A Flash Update will advise key details when available, with a further Flash Update on Tuesday (December 16th) covering the November CPI release.  Greater detail will follow shortly thereafter with the full newsletter.  
– Best wishes to all, John Williams

Recent Economic Overstatements Continue to Surface Post-Election.  As seen with last week’s payroll report and in this week’s trade deficit and retail sales reporting, the depth of the recently declared recession has been greater than indicated by earlier, pre-election reporting. Such appears to be the nature of statistical estimates reported under the auspices of the Executive Branch. Some of the reporting problem likely is due to upside assumptions built into key series, where any guesstimates made generally do not allow for the possibility of an economic downturn. Some of the reporting, however, well may involve more direct data massaging.

Real Retail Sales Contraction Deepens, Despite Collapsing Gasoline Prices. The Census Bureau reported this morning (December 12th) that seasonally-adjusted sales for the month of November — the opening month of the holiday shopping season — fell by 1.76% (by 2.21% net of revisions) +/- 0.6% (95% confidence interval), versus a revised decline of 2.95% (previously 2.77%) in October. The declines, once again, were exacerbated by a fall in gasoline prices, but as indicated in November’s "core" measure, they still were significant.  The extreme volatility in monthly gasoline prices has been enough to affect levels of consumption.  Based on Department of Energy reporting, average gasoline prices in November were down by roughly 30%, versus a not-seasonally-adjusted decline in gasoline station sales of 23.6%, and a seasonally-adjusted 14.7% drop.

On a year-to-year basis, November retail sales (before inflation adjustment) were negative for a third month, down by 7.41%, versus a revised 4.63% (previously 4.11%) decline in October.  

Real Retail Sales.  Real (inflation-adjusted) November retail sales still should show a small month-to-month decline, after a likely sharp monthly decline in the November CPI, while the pace of real year-to-year decline should continue to deepen. Details will follow the CPI reporting on Tuesday (December 16th). The retail sales series tends to lead activity in the broad economy. The patterns of declining monthly, quarterly and annual real retail sales remain consistent with a deepening recession, and they are not yielding any hint or sign of a pending economic bottom or upturn.

Core Retail Sales.  Consistent with the Federal Reserve’s predilection for ignoring food and energy prices, "core" retail sales — retail sales net of grocery store and gasoline station revenues — fell by 0.30% (down 0.81% net of revisions) in November, following revised 1.82% (previously 1.65%) decline in October. Those numbers contrasted with the official aggregate drop of 1.76% in November and the revised 2.95% in October.  On an annual basis, November "core" retail sales fell by 6.92%, versus a revised 6.53% (was 5.95%) decline in October.

Annual PPI Inflation Slowed to 0.4%. Absorbing a further severe hit from the recent collapse in oil prices, the regularly volatile Producer Price Index (PPI) for finished goods contracted by a seasonally-adjusted 2.2% (2.9% unadjusted) in November, versus a 2.8% (2.6% unadjusted) decline in October, as reported this morning (December 12th) by the Bureau of Labor Statistics.  Going against a 2.6% monthly spike in the November PPI of last year, the current November’s PPI year-to-year inflation fell to 0.4% from 5.2% in October.

If the monthly PPI should decline by 1% or more in December’s reporting, a year-to-year deflation number would be likely for the series. Since 1980, the finished goods PPI has shown formal deflation (year-to-year decline) in 1986, 1994, 1997/1998 and 2001/2002, without the CPI ever following suit. Those declines and related index volatility often were tied to large swings in oil prices.

On a monthly basis, seasonally-adjusted November intermediate goods fell by 4.3% (down 3.9% October), crude goods fell by 12.5% (down 18.6% October). Year-to-year inflation slowed sharply, with November intermediate goods up by 2.6% (10.2% October) and November crude goods down by 19.4% (down by 1.4% October).

Other Reporting. Trade Deficit: The seasonally-adjusted October trade deficit widened to $57.2 billion from a revised $56.6 billion (previously $56.5 billion) in September, reflecting a sharper decline reported in exports than in imports. Unusual in the data was a renewed surge in the physical volume of October oil imports, which was suggestive of catch-up reporting. Prior data had helped to limit the scope of the reported third-quarter GDP contraction. Seasonally-unadjusted October oil entered the U.S. at a pace of 10.5 million barrels per day, up from 8.4 million in September, contrasted with last year’s respective October and September import rates of 10.2 million and 10.1 million.

New Claims for Unemployment Insurance: The weekly surge in the latest (week-ended December 6th) new claims for unemployment insurance was little more than the regular volatility seen around a holiday period (Thanksgiving), thanks to the Department of Labor’s inability to adjust the reported activity adequately for seasonal variations. Smoothed using the 17-week moving average, new claims are up by 48.1% year-to-year (a positive reading here is an economic negative), versus 43.3% just a month ago.

SGS-Ongoing M3 Measure: The initial SGS-Ongoing M3 estimate for annual growth in the November monthly average is roughly 8.8%, down from 10.8% in October. Final numbers will be posted on the Alternate Data tab over the weekend. Annual M2 growth increased from 7.4% in October to 7.6% in November, while M1 growth jumped from 7.6% to 11.5%. The relative gains in the much smaller M1 and M2 measures are due primarily to the shifting of funds out of M3, not to growth in the monetary base. 

Federal Deficit, Etc: Details on the federal budget deficit ($401.6 billion for the first two months of fiscal 2009, versus $154.1 billion in the same period of fiscal 2008) and data out of the quality-impaired Federal Reserve’s latest flow-of-funds data (third-quarter 2008) will be assessed in the Reporting/Market Focus of the upcoming SGS Newsletter, in conjunction with the Treasury’s 2008 GAAP-based financial statements (see opening note).

Week Ahead. Industrial Production: Expectations (Briefing.com) are for roughly a 0.5% decline in November industrial production.  Something worse than consensus, with a deepening pace of annual contraction, is likely.

CPI: With a further severe hit from gasoline prices (see Retail Sales comments), consensus estimates (Briefing.com) are for roughly a 1.5% month-to-month decline in the seasonally-adjusted CPI. Given the vagaries of how gasoline prices are handled, a slightly steeper contraction is possible.

Annual inflation would increase or decrease in November 2008 reporting, dependent on the seasonally-adjusted monthly change relative to the 0.90% monthly increase seen in November 2007.  The difference in growth would directly add to or subtract from October’s annual inflation rate of 3.66%. Accordingly, November’s annual CPI-U inflation could fall to near 1.0%. With oil likely near a low and the December 2007 CPI showing a monthly increase of 0.36%, the annual CPI inflation rate likely will be close to a near-term bottom after this reporting. I still look for higher inflation in 2009 and do not expect to see year-to-year contraction — formal CPI deflation — in the months ahead, as will be discussed in the upcoming newsletter.

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