What Difference A New Year Makes. With year-end trading out of the way, add a couple of economic readings suggestive of a deepening inflationary recession and the stock market begins to react as though it has been hit with the stomach flu. The flu, though, likely would be more pleasant, since it usually passes in a couple of days. Factors such as heavy dollar selling, oil pushing to $100, and gold topping its old high of $850, again are signaling that the underlying problems are deep and eventually life-threatening to a financial system stuck in a severe, structural inflationary recession, and dependent on systemic liquidity based on a rigged U.S. dollar and on financial leverage built upon leverage built upon leverage that has started to collapse. Irrespective of near-term volatility in the various markets and any central bank market manipulations, the outlook for the year ahead remains unchanged, with stocks falling into a major bear market, heavy selling of the U.S. dollar, a strong rally in the price of gold, and an eventual sharp spike in long-term interest rates, when U.S. dollar dumping turns into flight for safety away from the dollar.

 

Manufacturing Industry in Contraction. The Purchasing Managers December manufacturing index showed an outright monthly contraction in manufacturing, falling to 47.7 from November’s 50.8. A diffusion index reading below 50.0 is negative by definition, and December new orders fell to 45.7 from 52.6 in November. The manufacturing survey is a highly meaningful predictor of broad economic activity, and these readings are consistent with a recession in the broad economy.

 

The December non-manufacturing survey held above 50.0, but that survey has little predictive value related to the broad economy (see the December SGS newsletter). The employment numbers remained soft to weak, and prices paid components remained strong in both surveys.

Payroll Reporting Games Continue. The jobs report fain was heavily manipulated to keep the payroll number positive, albeit a minimal gain of 18,000 nonfarm jobs in December. Politically, it is extremely important for the Bush Administration to keep the monthly jobs changes on the plus side, because a down month or two could provide the timing base needed for the National Bureau of Economic Research (NBER) to call a recession, and such is not wanted in an election year. As with the month before, the reported monthly payroll gain was statistically indistinguishable from a monthly contraction. Keep in mind that beyond the standard gimmicks highlighted below, the Bureau of Labor Statistics (BLS) simply can report any jobs number it desires. The current message from the reporting seems to be that the Administration does not want to show a recession, but it would like Mr. Bernanke to ease further.

 

Payroll Survey. Using the usual seasonal-factor and bias gimmicks, the BLS reported seasonally-adjusted December payrolls up by 18,000 (28,000 net of revisions) +/- 129,000, following November’s revised 115,000 jobs gain (previously 94,000). Unadjusted year-to-year payroll growth fell to 0.92% in December, down from 1.10% (previously 1.04%) in November. The regular monthly decline in annual growth — now below 1.0% — has historic parallels seen only during recessions.

 

The reported December employment increase also ran counter to the background of the better employment-environment indicators, with collapsing November help-wanted advertising, surging new claims for unemployment insurance, and recession-level and near-recession-level employment readings, respectively, for the manufacturing and non-manufacturing December purchasing managers surveys.

Seasonal-Factor Gimmicks. As discussed regularly in the newsletters, the monthly seasonal factors are readjusted each month as needed, and the BLS can generate any desired result. Using consistently adjusted and unadjusted annual growth rates suggest that December would have shown a 15,000 jobs loss, instead of the reported 18,000 payroll gain.

 

Bias Adjustment. December’s upside bias add-factor (from the birth-death model) was 66,000 in December, versus 51,000 in November, and little changed from the 64,000 used in December 2006. Fortunately for an otherwise troubled financial industry and a minimal overall 18,000 jobs surge, 17,000 jobs were added to financial activities as mindless adjustment. The birth-death model gets revised next month, along with the annual benchmark revision to payroll levels.

 

Household Survey. The statistically-sounder household survey, which counts the number of people with jobs, as opposed to the payroll survey that counts the number of jobs (including those of multiple job holders), showed (after revised seasonal factors) seasonally-adjusted December employment plunging by 436,000, following a 631,000 (previously 696,000) gain in November. The seasonally-adjusted December U.3 unemployment rate jumped to 4.98% +/- 0.23%, a statistically meaningful increase from November’s 4.67% (previously 4.66%) unemployment rate, while unadjusted U.3 rose to 4.8% in December from 4.5% in November. The broader, adjusted November U.6 rate soared to 8.8% in December from 8.4% in November, while unadjusted December U.6 rose to 8.7% from 8.1% in November. Adding back in the "discouraged workers" defined out of existence during the Clinton Administration, the actual unemployment rate is inching higher, running around 12.5%.

 

A repeated note of caution: with annual benchmark, seasonal-factor, bias adjustment and population re-jiggering revisions due in the next employment report, the BLS, can bring in the January payroll and household numbers as desired.

Money Supply Growth Pulls Back from Peak. With more than three weeks of reporting in place for December, the annual growth in December’s monthly average of the SGS-Ongoing M3 estimate is likely to come in around 15.2%, down from its near-term peak of 15.7% in November. That level, nonetheless, remains one that historically has been highly inflationary. A formal, preliminary estimate will be published next weekend.

 

In a related development, the Fed’s discount window lending to troubled banks continued to soar in the most recent reporting. The daily average loan level jumped to $5.3 billion in the two weeks ended January 2nd, up from $3.8 billion in the preceding two-week period and from $0.2 billion in the period before that. The solvency crisis is likely to deteriorate sharply, now that year-end bookkeeping gimmicks and obfuscation have been settled on.

Quiet Week Ahead Except for Trade Data. The only major economic report due in the week ahead is the November trade deficit on Friday (January 11th). Expectations are for minor monthly deterioration, reality should be major monthly deterioration, but the Administration and Fed’s needs for a non-recessionary economy could produce a bogus surprise improvement. Any happy news on the trade not only would be a plus for the greenback, but also would tend to spike the "advance" estimate of first-quarter GDP growth, due at the end of the month. 

 

Further details follow in the January SGS newsletter.