FLASH UPDATE

January 30, 2009

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 Nominal GDP Contraction Worst in 50 Years

Depression-Like Annualized Quarterly Contraction for
Durable Goods (43.3%)

Monetary Base Growth Flattens Out (at 103%)

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 PLEASE NOTE: A full newsletter is targeted for over this weekend, most likely to be published on Monday, February 2nd. The next Flash Update will follow the January 2009 payroll report, with payroll benchmark revisions, due on Friday, February 6th. As always, unusual developments would trigger earlier commentary.

– Best wishes to all, John Williams

Official GDP Reporting Shows Recession.   Given the heavy upside growth biases built into official GDP reporting, it almost was a shock to see this morning’s (January 30th) official reporting of a GDP recession. Not only did the real (adjusted for inflation) fourth-quarter GDP contract for the second consecutive quarter, but also year-to-year change turned negative. In the 2001 recession — the prior formal downturn recognized by recession arbiter National Bureau of Economic Research (NBER) — three consecutive quarterly contractions and year-to-year declining growth did not appear in the Bureau of Economic Analysis’ (BEA) reporting until the ensuing benchmark revisions of 2002. In subsequent revisions, however, both the 2001 annual and consecutive quarterly contractions disappeared.  The NBER called the current recession just after the election.

Real GNP Weakest Since First-Quarter 1982. The BEA’s "advance" estimate of real annualized growth in the fourth-quarter 2008 GDP was a statistically significant decline of 3.80% +/- 3% (95% confidence interval), reflecting a deepening pace of contraction versus the 0.51% downturn reported in the third quarter. In terms of year-to-year change, the fourth quarter turned negative, down by 0.18%, versus the third quarter’s annual gain of 0.75%.

As usual, the data published for the GDP are of little meaning — other than for political or financial market purposes — given the paucity of hard numbers available at this time for the fourth quarter, and given the heavily rigged nature of GDP reporting in general. Consider, for example, that Personal Consumption Expenditure (PCE), which represents roughly 71% of GDP — improved from an annualized contraction of 3.8% in the third quarter, to 3.5% in the fourth, while the annualized contraction in seasonally-adjusted real retail sales sank from an 11.1% downturn in the third quarter to a 17.1% contraction in the fourth. Key series such as housing, industrial production and new orders for durable goods all are showing annualized quarterly percent declines in excess of 10%.

Based on earlier reporting methodologies and removal of some reporting gimmicks, the SGS-Alternate GDP estimate for the fourth quarter was an annual (not annualized) contraction of roughly 4.1% versus a 3.3% contraction in the third quarter, against official respective estimates of a 0.2% decline and 0.7% gain. Against reporting of underlying economic series, an annualized quarterly contraction in excess of 7% for the fourth quarter would have been more realistic than the published 3.8% estimate.

The BEA’s GDP-like measures for fourth-quarter 2008; Gross National Product (GNP), where GDP is GNP net of trade in factor income (interest and dividend payments); and Gross Domestic Income (GDI), which is the income-side equivalent of the GDP’s consumption estimate; likely will not be published until the second revision in March, due to the lack of hard data available for the advance estimate, and given that the numbers are annual and more heavily relied on than partial-year data.

Nominal GDP Growth Plunged.  Thanks to a small annualized contraction in the fourth quarter GDP’s inflation rate (implicit price deflator) of 0.26%, versus an inflation gain of 3.88% in the third quarter, nominal GDP contracted at a faster pace than real GDP. Nominal GDP is not adjusted for inflation and reflects sales and revenues the way a company would book them for accounting purposes (except they usually would not be annualized). On that basis, fourth-quarter nominal GDP dropped at a seasonally-adjusted annualized pace of 4.05%, the sharpest decline since first-quarter 1958. Such was against at 3.35% annualized gain in third-quarter 2008. On a year-to-year basis nominal growth in fourth-quarter GDP softened to 1.66% (weakest since first-quarter 1961), from 3.31% in the third quarter.

Durable Goods Orders Keep Plunging. The regularly-volatile new orders for durable goods continued collapsing on both a month-to-month and year-to-year basis in December. December’s seasonally-adjusted monthly decline of 2.6% (5.4% net of revisions) followed a revised drop of 3.7% (previously 1.0%) in November. Before any accounting for inflation, December’s new orders were down 19.7% from December 2007, against November’s revised 19.1% (previously 17.6%) tumble from November 2007. Following an annualized third-quarter contraction of 8.1%, new orders in the fourth quarter fell at an annualized pace of 43.3%.

The widely followed new orders for nondefense capital goods also fell, down by 5.9% for the month of December, after a revised 4.6% (previously 0.8%) decline in November. Year-to-year, orders fell by 24.0%, following a 22.5% (previously 20.8%) annual drop in November.

Annual Monetary Base Growth at 103.3% in Latest Two-Week Period. Yesterday’s release of bank reserve data showed the annual growth in the St. Louis Fed’s Adjusted Monetary Base easing to 103.3% in the two weeks ended January 28th, down from 107.2% in the prior period. Such primarily reflected a decline in excess reserves, with required reserves (seasonally-unadjusted) easing slightly in terms of annual growth to 45.0% in the latest two weeks, from 50.4% in the prior period. This suggests continued growth in depository accounts and the broader money measures, as will be updated in the full newsletter, incorporating Federal Reserve reporting on large time deposits later today.

More detailed analysis of these and other economic data follows in the upcoming full newsletter.

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