JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

January 16, 2009

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 CPI-U Dodges Deflation Bullet

Depression-Like Annualized Quarterly Contractions for
Real Retail Sales (17.1%) and Industrial Production (11.5%)

Broad Money Growth Surge Intensifies

Money Supply Velocity Also Likely in Upturn

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PLEASE NOTE: The next Flash Update will be next Friday with updated housing numbers, further detail on money supply and any post-Inaugural analysis.  Unusual market developments could trigger earlier commentary.

– Best wishes to all, John Williams

With Rising Gasoline Prices, Surging Money Growth, December Annual Inflation Likely Was Near-Term Trough. The Bureau of Labor Statistics (BLS) reported this morning (January 16th) that December’s annual CPI-U (CPI for All Urban Consumers) inflation held in positive territory, avoiding a possible shallow but brief bout with official deflation. The CPI for Urban Wage Earners and Clerical Workers (CPI-W) and the substitution-based Chain-Weighted-CPI-U (C-CPI-U), however, did contract year-to-year. December’s annual CPI-W was down by 0.5%, as was the C-CPI-U. Using the SGS-Alternate CPI measures, however, annual deflation still was not on the horizon.

Nearly all of the recent slowing/decline in reported annual inflation has been tied to collapsing oil and related gasoline prices. Of significance, recent retail gasoline prices have turned higher, with the average weekly price for all grades of gasoline averaging 9.9% higher in the January 12th week than at year-end 2008.

The greatest threat for resurgent inflation, however, is the rapid growth increasingly evident in the broad money supply (SGS-Ongoing Estimate of M3), as discussed later. Significantly higher inflation looms later in 2009, despite the accelerating collapse in business activity.

CPI-U.  The BLS reported seasonally-adjusted December CPI-U declined by 0.74% (down by 1.03% unadjusted) +/- 0.12% for the month, versus a decline of 1.68% (down by 1.92% unadjusted) in November.  Year-to-year or annual inflation in December narrowed to 0.09% from 1.07% in November, remaining minimally in positive territory.  For those interested in exploring the various facets of official CPI-U reporting, I continue to refer you to CPIwatch.com, a site prepared by one of my SGS colleagues.

Annual inflation would increase or decrease in January 2009 reporting, dependent on the seasonally-adjusted monthly change versus the 0.39% monthly increase seen in January 2008.  The difference in growth would directly add to or subtract from December’s annual inflation rate of 0.09%. With seasonal factors boosting the January reporting, an upside movement in annual inflation is possible. Shy of a further significant collapse in oil prices, annual CPI-U should be at or very near its trough for the current cycle.

C-CPI-U.  Year-to-year or annual inflation for the Chain Weighted CPI-U — the fully substitution-based series that increasingly gets touted by CPI opponents and inflation apologists as the replacement for the CPI-U — turned negative in December, to a 0.54% decline, following to 0.69% gain in November.

Alternate Consumer Inflation Measures. Adjusted to pre-Clinton (1990) methodology, annual CPI growth eased to roughly 3.4% in December, down from 4.4% in November, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, dropped back to roughly 7.8% in December, from 9.3% in November.  The alternate numbers are not adjusted for any near-term manipulations of the data.

Annual Averages. The 2008 annual average inflation rate for the CPI-U was an 18-year high of 3.84%, versus 2.85% in 2007. The 2008 annual average inflation rate for the SGS-Alternate Consumer Inflation Measure (1980 methodologies) was a 28-year high of roughly 11.6%, versus 10.5% in 2007.

Real Retail Sales.  Real (inflation-adjusted) December retail sales fell by 1.94% on a monthly basis, following a revised 0.45% (previously 0.08%) decline in November, deflated using the CPI-U. Annual real retail sales fell by 9.09% in December, versus a 9.11% contraction in November, the steepest annual declines since 1952. On a three-month moving-average basis the December and November declines were 8.88% and 7.87%, respectively. The December annual moving-average decline was the deepest in the history of the two most recent retail series, making the results the worst of the post-World War II era. The annualized real contraction for fourth-quarter 2008 retail sales was 17.1%.

The inflation-adjusted 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 severely deepening recession and continue not to yield any hint or sign of a pending economic bottom or upturn.

Producer Price Index Continues Following Oil. The regularly volatile Producer Price Index (PPI) for finished goods turned negative year-to-year as it absorbed still another severe hit from the recent collapse in oil prices. As reported by the Bureau of Labor Statistics (BLS), yesterday (January 15th), the December PPI declined by a seasonally-adjusted 1.9% (1.9% unadjusted) versus a 2.2% (2.9% unadjusted) drop in November. December PPI year-to-year inflation contracted by 0.9% — formal deflation — following a 0.4% gain in November.  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 December intermediate goods fell by 4.2% (down 4.3% November), crude goods fell by 5.3% (down 12.5% November). Year-to-year inflation declined, with December intermediate goods down 1.7% (up by 2.6% November) and December crude goods down by 25.0% (down by 19.4% November).

M3 Growth Surges. With full reporting in place for the month of December, annual growth was higher across the board for M1, M2 and the SGS-Alternate Measure of M3. For December, annual M3 growth surged to roughly 10.7% from its recent trough of 9.1% in November. The latest reporting of M3 components suggests a likely further surge in the January 2009 average, but a estimate on that will not be formalized for a couple of weeks.

Annual growth for M2, in December, also surged, rising to 9.5% from 7.6% in November. Thanks to rapid growth particularly in demand deposits (checking accounts), annual M1 growth in December exploded to 17.1%, from 11.5% in November.

Bank reserves and the monetary base (reserves plus cash in circulation) have continued to show unprecedented growth in the latest reporting (two weeks ended January 14th), with required reserves (unadjusted) up by 40% year-to-year, and the St. Louis Fed’s adjusted monetary base up by 110%. The historic systemic liquefaction by the Fed has started to trigger increased bank lending and some return to normalcy in the markets, and it promises accelerated growth in the broader money measures.

As individuals continue to pull the cash out from under their mattresses, money supply velocity also should be increasing (see the Money Supply Special Report of August 23, 2008 for background). Such, in conjunction with the rising M3 growth, promises significantly higher consumer inflation in the year ahead.

Annual Change in Industrial Production at 33-Year Low. The Federal Reserve reported this morning (January 16th) that seasonally-adjusted December industrial production fell by 2.0% (down 2.4% net of revisions) for the month, after a revised 1.3% (previously 0.6%) decline in November. The year-to-year decline in December fell to a contraction of 7.8%, the weakest showing since September 1975. Such followed November’s revised 5.9% (previously 5.5%) drop. Consistent with the still-deepening recession, fourth-quarter 2008 production showed an annualized quarterly contraction of 11.5%, following an 8.9% contraction in the third quarter.

A depression is defined (SGS) as a recession where peak-to-trough contraction exceeds 10%, a level currently exceeded in annualized terms by both fourth-quarter real retail sales and industrial production.

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