JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

January 9, 2009

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December Jobs Loss Was 697,000 Net of
Concurrent Seasonal Factor Bias (Instead of Official 524,000 Loss)

Congressional Budget Office Estimates Depression Era-Like GDP Drop

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PLEASE NOTE: An updated estimate of the SGS-Ongoing M3 will be posted over the weekend on the Alternate Data tab. Based on last night’s weekly reporting on M2 and institutional money funds, there are not likely to be any meaningful revisions to the December monthly estimates.

– Best wishes to all, John Williams

CBO Budget and GDP Estimates Without Precedent. Even politically neutral government entities such as the Congressional Budget Office (CBO) tend to be overly optimistic with their assumptions and projections. As such, it was something of a surprise to see an estimate of a 2.2% annual contraction in real (inflation-adjusted) U.S. gross domestic product for 2009.   Such would be the worst full-year annual GDP contraction since the special circumstance of the shutdown of war production at the end of World War II. Beyond that, the comparisons go back to the Great Depression. 

The worst year in that period of economic collapse was a drop of 10.8% in 1932. The Great Depression, however, like the current circumstance, was a multiple-dip downturn. The worst annual GDP decline during the second-dip of the Great Depression was 3.4% in 1938.

The CBO also estimated that the official "gimmicked" 2009 federal budget deficit would hit $1.2 trillion, in this less-than-happy environment, and such was without including the full cost of the wars in Iraq and Afghanistan, and before including the costs of the stimulus package being promised by the incoming Obama Administration. The estimates of a $2 trillion 2009 deficit and related U.S. Treasury funding needs, used in SGS Newsletter No. 48 of January 3rd, appear to be somewhat on the light side of what is unfolding.   

Employment Circumstance Continues to Be Worse Than Initial Reporting. — Payroll employment continued to sink faster than had been reported initially by the Bureau of Labor Statistics (BLS), with monthly revisions consistently showing sharp downside revisions to prior months, and with the Concurrent Seasonal Factor Bias (CSFB) continuing to show major ongoing distortions to the headline reporting of payrolls, as shown in the accompanying graph and as discussed below. Even so, the year-to- year percentage decline in December 2008 payrolls was the weakest since 1982.

Payroll Survey. The BLS reported a statistically-significant, seasonally-adjusted jobs loss of 524,000 (down 678,000 net of revisions) +/- 129,000 for December, following a revised 584,000 (previously 533,000) jobs loss in November. Annual contraction (unadjusted) in total nonfarm payrolls continued to deepen, down 2.03% in December, versus a revised 1.49% (was 1.47%) in November. The seasonally-adjusted series also contracted year-to-year, down by 1.88% in December, versus 1.47% (was 1.35%) in November.

Concurrent Seasonal Factor Bias. The pattern of impossible biases (see the Reporting/Market Focus in SGS Newsletter No. 43 of June 10, 2008) being built into the headline monthly payroll employment continued with December reporting. Instead of the headline jobs loss of 524,000, consistent application of seasonal-adjustment factors — net of what I call the concurrent seasonal adjustment bias — would have shown a more-severe monthly jobs loss of about 697,000. This upside reporting bias has been seen in 11 of the last 12 months, with a rolling 12-month total upside headline-number bias of 1,150,000. A worksheet on this is available upon request.

Birth-Death/Bias Factor Adjustment. An element that muted the reported December jobs loss was the monthly bias factor (birth-death model). Never designed to handle the downside pressures from a recession, the model added a 72,000 upside jobs bias to December 2008 (versus an upside bias of 70,000 in December 2007), and followed a net upside bias of 30,000 jobs in November 2008. The process boosted financial-activities by 18,000, but subtracted 8,000 from construction. Although the adjustments are made to the unadjusted series, they flow through at roughly the same magnitude in the seasonally-adjusted series. 

Household Survey.  The usually statistically-sounder household survey, which counts the number of people with jobs, as opposed to the payroll survey that counts the number of jobs (including multiple job holders), showed household employment fell by 806,000 (947,000 net of revisions) in December, after a revised 513,000 (previously 673,000) decline in November. The series suffered its annual revision to seasonally adjusted data. Such showed that the rise in unemployment had been underreported consistently in the last half of 2008.

The December 2008 seasonally-adjusted U.3 unemployment rate showed a statistically-significant increase to 7.17% +/- 0.23% from a revised 6.78% (previously 6.68%) in November.  Unadjusted U.3 rose to 7.1% in December from 6.5% in November.  The broader December U.6 unemployment rate jumped to an adjusted 13.5% (13.5% unadjusted) from a revised 12.6% (12.2% unadjusted) in November.  

During the Clinton Administration, "discouraged workers" — those had given up looking for a job because there were no jobs to be had — were redefined so as to be counted only if they had been "discouraged" for less than a year. This time qualification defined away the bulk of the discouraged workers. Adding them back into the total unemployed, actual unemployment, as estimated by the SGS-Alternate Unemployment Measure, rose to 17.5% in December from 16.6% in November.

Employment Environment. The continued broad deterioration in December’s employment environment broadly was in line with the better-quality employment-environment indicators: November help-wanted advertising was at an historic low, with indications of sharp annual fall-off in November online help-wanted advertising; new claims for unemployment insurance have continued to surge sharply in terms of annual growth; and generally deepening and recession-level employment readings continued in both the December manufacturing and nonmanufacturing purchasing managers survey. Since the employment and unemployment indicators tend to be coincident markers of broad economic activity, weaknesses in these numbers are signaling an ongoing and deepening recession in place.

Week Ahead. CPI: As discussed in the January 3rd newsletter, annual inflation would increase or decrease in next Friday’s (January 16th) reporting of the December 2008 CPI-U, dependent on the reported seasonally-adjusted monthly change versus the 0.36% monthly increase seen in December 2007. The difference in growth would directly add to or subtract from November’s annual inflation rate of 1.07%.

With average monthly gasoline prices dropping by roughly another $0.19 per gallon in December (per the Department of Energy), the seasonally adjusted CPI could fall by roughly 0.9%. Consensus estimates are for a monthly decline of 1.0% (Briefing.com). If the CPI so declined, annual inflation would turn negative by 0.2% to 0.3%. Albeit minimal and likely fleeting, such would represent formal deflation and the first outright decline in the CPI-U since a 0.4% drop in August 1955. Of course, if the CPI today were calculated the same way it was back then, annual inflation December would be near 8%, instead of showing a fractional decline.

Retail Sales: December retail sales, due for release on Wednesday (January 14th) should contract more than the consensus expectations, which seem to running in the vicinity of a one-percent decline. Negative CPI inflation would tend to mute the real (inflation-adjusted) impact, but both before and after inflation, monthly and annual retail sales should continue in deepening downturn.

Industrial Production: December industrial production (due Friday, January 16th) also should contract sharply, in tandem with the plummeting purchasing managers survey’s indications. Worse-than-expected monthly and annual contractions are a fair bet.

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