JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

Unusual Features in Upcoming Employment Report

Annual Broad Money Growth Continues to Expand

Economic Freefall Eventually Sees Some Bottom-Bouncing

PLEASE NOTE: I have shifted the full newsletter to next Monday, February 9th. It will include the January employment and benchmark revision detail, a first cut on the January SGS-Ongoing M3 monthly average and annual growth, as well as some historical perspectives on money supply growth, consumer inflation and economic activity surrounding and during the Great Depression. A Flash Update will follow the payroll report release on Friday, February 6th. As always, unusual developments would trigger earlier commentary.

– Best wishes to all, John Williams

Bottom Bouncing Does Not Signal Pending Good Times. Underlying economic fundamentals have continued in freefall, but such will not continue indefinitely. Some bottom-bouncing is normal in periods of sharp business decline and such may be seen in economic reporting of the months ahead. That will not mean looming economic recovery. It will just be some bottom-bouncing as the broad economy keeps rolling down hill — albeit with occasional bumps — in a further downleg of a multiple-dip recession/depression. Despite near-term volatility and unusual seasonal-factor revisions, yesterday’s (February 2nd) purchasing managers manufacturing survey was something of an example, where a variety of measures ranging from new orders to prices paid bounced off historic or near-historic lows, but where the underlying indications of economic activity were not changed. (Details of the purchasing managers surveys and annual revisions will be covered in the upcoming newsletter.)

With political pressures shifting towards getting the Obama stimulus package enacted, and with the Administration and markets acknowledging a bad recession in place, some reporting pressure, or at least the hype, has shifted to the downside, although anecdotal evidence suggests that most numbers are coming in weak of their own accord. Weakness recognized now could be used to set as low a base as possible, against which future "Obama-generated" activity can be measured.

Political hype indeed is exaggerating some negative conditions, although economic reality likely is not too far behind catching up with the hype. Consider references to jobs losses or employment drops as being the worst ever, or worst since the Great Depression. While such may be true for a purely physical count, that is not so on a percentage basis, where the total number of employed after World War II was less than a third of today’s level. Accordingly, the "worst since …" comments on recent payroll declines and related employment measures more appropriately should be applied to the double-dip recession of the early 1980s. That soon will move to the 1973/1975 recession, and then post-World II/Great Depression.

In the other direction, Messrs. Bernanke and Geithner need to maintain a stable or relatively strong U.S. dollar in the still-evolving systemic solvency crisis, and such requires contained inflation numbers and stronger economic data than might be expected in the now recognized recession. With the systemic crisis remaining a threat to national security, almost anything remains possible in the arena of data and market manipulations. Data and market manipulations remain extremely inexpensive and effective policy tools, but their use presumably depends to a certain degree on perceived financial-market vulnerability. 

Absent manipulation, and against market expectations that have shifted sharply to the downside, most near-term economic reporting still should tend to surprise the markets on the downside. With inflation expectations having tanked and likely bottomed along with oil prices, most inflation reporting going forward should tend to surprise expectations on the upside.

As will be discussed in the upcoming newsletter, the broad economic and financial outlook remains unchanged.

Annual January M3 Growth Likely to Top 12%. Based on 19 to 21 (of 31) days of reporting for January, annual growth in the SGS-Ongoing M3 estimate is likely to top 12%, versus the 11.4% estimated in December.   Weekly growth in M2 and institutional money funds has continued to pick up. Within the M2 and M1 components, balances in demand deposits (checking accounts) are declining, while savings accounts are gaining. As a result, M1 growth is slowing slightly, while M2 growth is surging. Monthly estimates of average level and annual growth for January 2009 will be published over the next weekend and in the upcoming newsletter.

January Payroll Reporting Subject to Unusual Pressures. Key indicators of employment activity continue to deteriorate and suggest that further deterioration is likely in both the upcoming January payroll employment and unemployment reporting. Annual benchmark revisions and unusual seasonal-factor pressures from the birth-death model, however, leave the Bureau of Labor Statistics (BLS) with unusual leeway as to what could be reported with payrolls.

Due along with the January jobs reporting is the publication of an annual benchmark revision that will restate payroll levels back for several years, due to a benchmarking of March 2008 payroll employment estimates with state employment tax filings. The BLS has previously estimated that it will revise the unadjusted March 2008 payrolls downward by an estimated 21,000 jobs. The BLS then will change recent growth patterns based on the revamped estimate.

Also, the birth-death model, which adds an upside bias to monthly employment levels over the year, will experience its once-a-year contraction in January. This circumstance reflects a traditional peak in business closings in December, at year-end. In January 2008, the birth-death model subtracted 378,000 jobs from the total. After several years of missteps, the BLS recently has been adjusting for the downside bias with appropriate seasonal factor offsets. Nonetheless, the bias has the potential of exacerbating the reported monthly decline.  

Employment Environment. The January employment environment continued to deteriorate in terms of the better-quality employment indicators. December help-wanted advertising (Conference Board, newspapers) sank to a new historic low (lowest since the series was started in January 1951), along with indications of a sharp annual fall-off in January online help-wanted advertising (Conference Board, online). While the online series is too limited historically to be used in formal forecasting, the deteriorating year-to-year decline of 39.1% for new help-wanted ads in January cannot be a good sign. Since help-wanted advertising is a leading indicator to the employment report, the signals are negative for both January and February reporting.

The ongoing rapid rise in initial claims for unemployment insurance (also a leading indicator) continued to reflect the severe deterioration in labor market conditions, where a rising growth trend in new claims is an economic negative. On a smoothed basis for the 17 weeks ended January 24th, annual growth hit 55.3%, its highest level since August 1980 (1980 peak growth was 59.4%; 1975 peak growth was 78.8%). The January 24th growth rate was up from 52.1% annual growth as of the 17 weeks ended December 27th.

With the reporting of the February purchasing managers manufacturing survey (also a leading indicator), the employment component held even with January’s reporting, at its lowest level since November 1982, the reporting trough for that series during the double-dip recession of the early 1980s.

Pending Reporting. Consensus expectations (Briefing.com) for roughly a 500,000 payroll jobs loss (versus a 524,000 loss in December), and for an increase the U.3 unemployment rate to 7.5% from December’s 7.2%, are not unreasonable. 

The employment indicators discussed above are more consistent with a 700,000 payroll jobs loss, but recent reporting patterns suggest this might be realized with a softer decline reported in January, in conjunction with sharp downward revisions to prior reporting. Again, however, some of the usual monthly revisions may disappear into the changes made in the benchmark revision

As to unemployment, the broader U.6 unemployment rate is likely again to show a disproportionate increase relative to any deterioration reported in U.3, with the so-called marginally attached workers increasing at an accelerating pace. Such is symptomatic of rapidly declining economic activity.

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

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