FLASH UPDATE - January 23, 2009

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

January 23, 2009

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Major Revisions Show Stronger Broad Money Growth

Depression-Like Annualized Quarterly Contraction for
Housing Starts (68.5%)

Sharp Nominal Contraction Pending for 4th-Quarter GDP

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PLEASE NOTE: A full newsletter is targeted for over next weekend, most likely to be published on February 2nd. The next Flash Update will follow the "advance" estimate of fourth-quarter GDP on Friday, January 30th. As always, unusual developments would trigger earlier commentary.

– Best wishes to all, John Williams

Resurging Inflation and Accelerating Contraction in Business Activity. President Obama and Congress face extraordinarily troubled times, and I wish them well in the difficult years ahead. The consensus outlook is that the new Administration’s primary problem is the economy, but as discussed in various prior writings, the biggest threat to long-term U.S. economic health and social stability is inflation. Such should become apparent in the year ahead, as funding for stimulus efforts runs head-on into increasingly unwilling investors. With the Federal Reserve the practical buyer of last resort for U.S. Treasuries, increased monetization of U.S. Debt will flow through to accelerating growth in broad money and to what will become rapidly rising inflationary expectations.      

Despite a relatively quiet week of economic releases, the unfolding near-term view of economic conditions remains one of economic collapse combined with renewed inflation pressures. On the inflation front, the recent monthly declines in seasonally-adjusted CPI-U and slowing growth in annual inflation were due primarily to the plunge in oil and related gasoline prices. In January, oil prices appear to have bottomed and are slightly higher, so far, than they were in December. Gasoline prices as of the January 19th week averaged 13.6% higher than in the last week of December (Department of Energy). Annual growth in broad money supply appears to have bottomed in November, rebounding sharply in December, with even higher annual growth suggested by last night’s (January 22nd) issuance of major benchmark revisions by the Federal Reserve.

Following last week’s reporting of an 11.5% annualized contraction in fourth-quarter industrial production and a 17.1% and an annualized contraction in fourth-quarter real (inflation-adjusted) retail sales of 17.1%, fourth-quarter housing starts were reported yesterday (January 22nd) as contracting at an annualized pace of 68.5%. These contraction rates are at levels consistent with my definition of depression (a peak-to-trough contraction in excess of 10%). Not only is the economy showing no signs of moderation or pending upturn, but it is in a state of free-fall that suggests an annualized real fourth-quarter GDP contraction well in excess of the consensus 5.0%. Nonetheless, given the financial market and media’s blind acceptance of worthless "advance" reporting, the GDP charade should continue, with "advance" growth coming in near consensus, simply because the advance estimate usually is targeted at consensus forecasts.   

Major Benchmark Revisions Show Recent M3 Growth to Have Been Stronger. "The Federal Reserve has revised the measures of the money stock and its components to incorporate the results of its annual review of seasonal factors and a new benchmark revision," advised the U.S. central bank in its most recent release of money stock measures (H.6). Such always serves as a reminder as to the reporting quality issues that beset Federal Reserve reporting, just as they do the government’s statistical agencies. Given the ongoing banking solvency crisis, one might hope that the Fed had better-quality statistics on the banking system.

Based on the revisions, annual growth in M1 was little changed, up 17.0% (was 17.1%) in December, up 11.5% (was 11.5%) in November and up by 7.5% (was 7.6%) in October. For M2, however, annual growth revised to 9.9% (was 9.5%), November was up by 8.0% (was 7.6%), and October was up by 7.7% (7.4%).

Given the large upward revisions to M2 and to institutional money funds, but reflecting no further revisions to large time deposits (H.8), annual growth in the SGS-Alternate M3 estimate for December would revise to 11.4% from 10.7%, November’s growth trough would revise upward to 9.8% from the most recent reporting of 9.1%, with October’s annual growth up by 11.7% versus last reporting of 10.9%. The all-time peak growth in M3 back in March would revise to 17.2% from its prior estimate of 17.2%.

These numbers will be finalized after tonight’s (January 23rd) H.8 reporting, with detailed annual growth rates and estimated monthly average levels to be updated on the Alternate Data tab over this weekend.

In conjunction with the published revisions, however, the latest weekly data suggested stalled weekly growth in the M3 components, which could be a signal of pressures rebuilding in the banking solvency crisis. The weeks ahead will tell.

Housing Starts Growth Deteriorates Further. The Census Bureau reported that seasonally-adjusted December housing starts contracted by 15.5% month-to-month and by 45.0% year-to-year. Such contrasted with November’s revised monthly decline of 15.1% (previously 18.9%) and annual contraction of 44.8% (previously 47.0%). The current pace of annual contraction is on a par with the trough declines seen in the series during post-World War II recessions.

Week Ahead. GDP:With consensus estimates (per Briefing.com) around a real (inflation adjusted) 5.0% annualized quarterly contraction, and with the consensus GDP inflation around 0.9%, nominal (before inflation adjustment) GDP should show an annualized contraction of roughly 4.1%. Nominal GDP quarter-to-quarter contractions are reasonably rare, seen in the post-World War II era only in the worst of recessions.

If consensus estimates are met (odds favor this, as the "advance" estimate usually is targeted at the consensus estimate), then real annual GDP growth would turn negative by roughly 0.5%, versus 0.8% growth in the third quarter.  Negative year-to-year growth, which is typical during recessions, actually was revised away for the 2001 recession, in this heavily manipulated and politicized series.

Underlying economic fundamentals favor a much weaker than consensus showing for the fourth-quarter GDP. The only plus for this series is the highly questionable, sharp narrowing of the November trade deficit (see last newsletter).

New Orders for Durable Goods: Due Thursday, January 29th, the regularly volatile new orders for durable goods should show continued monthly and annual contractions in December, with the year-to-year contraction deepening.

Consumer Confidence: With the Conference Board’s Consumer Confidence due on Tuesday (January 27th) and the Reuters/University of Michigan Consumer Sentiment due on Friday (January 30th), both measures should show continued low readings, with any short-lived stability or gain likely due to what was the pending change in administrations at the time of the surveys.

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