JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

February 20, 2009

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 CPI-U Just Escaped Formal Deflation, Again

Housing and Real Retail Sales Annual Contractions at Historic Lows

Industrial Production Annual Contraction Hit 10%

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PLEASE NOTE: The next Flash Update is planned following the "preliminary" estimate revision to fourth-quarter 2008 GDP next Friday (February 27th).

– Best wishes to all, John Williams

Depression-Like Numbers Continue to Surface. My (SGS) definition of a depression is a recession, where the peak-to-trough contraction in economic activity exceeds 10%. Numbers suggestive of that threshold continue to surface, with industrial production down 10% year-to-year, with inflation-adjusted retail sales rounding to a 10% annual contraction, and with housing and new orders for durable goods numbers showing much steeper declines.

With the exception of industrial production, which dates back to 1919, most popularly-followed economic series of today were started after World War II. While the war itself was highly disruptive to the economy, such was not a normal business cycle and rarely is considered in historical economic comparisons. So, when an economic series starts showing its worst performance of the post-World War II period, describing same as the worst since the Great Depression is a reasonable assessment. On that basis, housing starts is the second major series (real retail sales was first) to hit its lowest annual percent growth of the post-World War II era, or since the Great Depression.

In terms of the latest money supply reporting, little weekly change was seen in last night’s (February 19th) reporting of M3 components M2 and institutional money funds. A more complete update on near-term money supply changes will follow in the next Flash Update.

CPI-U Inflation Hovers Above Zero. The Bureau of Labor Statistics (BLS) reported that January’s annual CPI-U (CPI for All Urban Consumers) inflation held in minimally-positive territory, again, avoiding a possible shallow but brief bout with official deflation. Due to instabilities of the seasonally-adjusted numbers, year-to-year inflation traditionally, and quite properly, is measured on an unadjusted basis. Formal deflation would reflect a year-to-year decline in the inflation measure.

The non-deflation result remains somewhat suspect, though, given the ongoing strong desire by the Fed to avoid formal deflation. Not only has the seasonally-adjusted CPI-U been in annual decline for two months (down 0.08% in December and down 0.15% in January), but also near-0.5% year-to-year contractions continued in both the January CPI for Urban Wage Earners and Clerical Workers (CPI-W) and the substitution-based Chain-Weighted-CPI-U (C-CPI-U). Viewed from the perspective of the SGS-Alternate CPI measures, however, annual deflation still was not on the horizon. The Fed also, of course, ideally would like to keep inflation reporting (and inflationary expectations) contained, while also avoiding deflation.

CPI-U.  The BLS reported that the seasonally-adjusted January CPI-U rose by 0.28% (up by 0.44% unadjusted) +/- 0.12% (95% confidence interval not seasonally adjusted) for the month, versus a revised decline of 0.79% (previously down by 0.74%) in December. The seasonally-adjusted inflation numbers were revised for revamped seasonals; the unadjusted numbers do not get revised.  Year-to-year inflation (unadjusted) in January softened further to 0.03% +/- 0.20% (95% confidence interval), from 0.09% in December.  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 February 2009 reporting, dependent on the seasonally-adjusted monthly change, versus the 0.17% monthly increase seen in February 2008.  The difference in growth would directly add to or subtract from January’s annual inflation rate of 0.03%. With continued upside pressure on gasoline prices, an upside movement in annual inflation remains an increasingly good possibility for February 2009 reporting. Shy of a further significant collapse in oil prices, annual CPI-U should be at or very near its trough for the current cycle.

Real Retail Sales.  Updating SGS Newsletter No. 49 and the February 12th Flash Update, and reflecting the revised, seasonally-adjusted CPI-U inflation, inflation- and seasonally-adjusted January retail sales rose by 0.76% (1.05% before inflation adjustment), versus a monthly decline of 2.27% (3.94% before inflation adjustment) in December. Year-to-year, January real (inflation adjusted) retail sales fell by 9.56% (9.70% before inflation adjustment), and by 10.40% (10.47% before inflation adjustment) in December.

On a three-month moving-average basis, the January and December annual declines were 9.76% and 9.41% (previously 9.39%), respectively. The January annual decline in the moving-average displaced December’s as the deepest in the history of the two most recent historical retail series, making the results the worst of the post-World War II era.

CPI-W.  The BLS reported that the narrower, seasonally-adjusted January CPI-W rose by 0.35% (0.43% unadjusted) for the month, following a revised 0.98% (previously 0.91% decline).  Year-to-year inflation in January declined by 0.51%, following a 0.47% drop in December.

C-CPI-U.  Year-to-year or annual inflation for 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 — fell by 0.54% in January, following a revised 0.55% decline (previously 0.54%) in December. The series underwent its annual revision.

Alternate Consumer Inflation Measures. Adjusted to pre-Clinton (1990) methodology, annual CPI growth eased to roughly 3.3% in January versus 3.4% in December, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, dropped back to roughly 7.5% in January, from 7.8% in December.  The alternate numbers are not adjusted for any near-term manipulations of the data.

Producer Price Index Shows First Monthly Gain Since July. Reflecting some bottoming in energy prices, the regularly-volatile, seasonally-adjusted producer price index (PPI) also turned positive, gaining 0.8% (0.9% unadjusted) for the month. Such followed a 1.9% month-to-month decline in December. The BLS data showed January’s year-to-year PPI inflation contracted by 1.0%, versus 0.9% in December. 

Accordingly, such was the second month of formal PPI deflation (year-to-year price decline), subsequent to a 0.4% gain reported for November.  As noted last month, since 1980, the finished goods PPI has shown formal deflation in 1986, 1994, 1997/1998 and 2001/2002, without the CPI-U ever following suit. Those declines and related index volatility often were tied to large swings in oil prices.

On a monthly basis, seasonally-adjusted January intermediate goods fell by 0.7% (down by 4.2% December), and crude goods fell by 2.9% (down by 5.3% December). The decline in year-to-year inflation deepened, with January intermediate goods down 3.5% (down by 1.7% December) and January crude goods down by 29.1% (down by 25.0% December).

Largest Annual Contraction in Industrial Production since 1975. The Federal Reserve reported that seasonally-adjusted January industrial production fell by 1.8% (down 2.2% net of revisions) for the month, after a revised 2.4% (previously 2.0%) decline in December. The year-to-year decline in January deepened to 10.0%, the weakest showing since July 1975, following a revised annual contraction in December of 8.2% (previously 7.8%).

Annual Growth in Housing Starts Worst Since Great Depression. The second major economic series to suffer its deepest annual percent contraction (three-month moving average) since World War II, housing starts fell by 16.8% (15.3% net of revisions) +/- 13.4% (95% confidence interval) month-to-month in January. The Census Bureau also revised December housing starts to show a 14.5% (previously 15.5%) monthly contraction. Year-to-year, January housing starts fell by 56.2%, versus a revised December contraction of 44.0% (was 45.0%). 

Based on a three-month moving average, the 48.2% annual contraction as of January 2009 was the worst showing of the two historical series going back to immediately post-World War II. Outside of war disruptions, housing starts were at their weakest annual growth level since the Great Depression.

Week Ahead.  New Orders for Durable Goods: The January report on new orders for durable goods, due next Thursday (February 26th), despite the series’ irregular volatility, it likely will continue to show continued monthly and annual declines, with the pace of annual decline still deepening.

GDP:Expectations (Briefing.com) are for a sharp downward revision in the already-negative estimate of annualized quarterly real GDP for the fourth quarter (due Friday, February 27th). Initially reported with a contraction of 3.8%, expectations for the "preliminary" estimate revision have moved to a contraction of roughly 5.4%. Such is not unreasonable, given recent trade deficit revisions (which often do not show up in current GDP reporting), but the estimated contraction remains far short of reality.

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