JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

February 27, 2009

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Budget Containment and a Normal 2010 Economy Are Nonsense

Economic Data Remain Consistent with
10%-Plus Hit to Business Activity

Upward Revision to GDP Inflation

Major Downward Revisions Likely to 2008 GDP

Intensifying Systemic Solvency Crisis

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PLEASE NOTE: The next Flash Update is planned following the release of the February employment report next Friday (March 6th). The next full newsletter should follow early in the week of March 15th. Any intervening Flash Updates or Alerts would be published as dictated by economic or financial developments. 

– Best wishes to all, John Williams

The new Brothers Grimm, Bernanke and Obama spun their fairy tales this week. Contrary to the happy news out of the Fed and the Administration, the U.S. economy is in a protracted and rapidly deteriorating recession. While there are no signals for a rebound in place before year-end 2009, there also is nothing on the horizon that would suggest a return to economic normalcy in 2010. At best there may be occasional bottom-bouncing at low levels of activity, as discussed in the SGS Newsletter No. 49. There also are suggestions that the banking solvency crisis is intensifying, once more. As to the formal budget deficit, look for it still to top $2 trillion in 2009, with new Treasury funding needed to cover that. The cost of the Federal Reserve and Administration’s actions remains inflation, much higher inflation in the year ahead.

While the Fed Chairman would like the markets to believe that he can reverse his extreme systemic liquefaction at will, that the markets happily will continue to buy U.S. Treasuries, and that the recession could be over next year, such is little more than wishful thinking aimed at trying to salve extraordinarily dangerous financial markets.

Multiple-year budget packages usually are little more than political hype, and the Obama Administration’s effort is a great deal of hype, wishful thinking, and creative definitions. Consider that the underlying economic assumptions are for a 1.2% annual contraction in inflation-adjusted GDP in 2009, versus the Congressional Budget Office’s projected 2.2% contraction. In the assumptions, the GDP is back to average growth in 2010 and is booming by 2011. Even so, the projected annual deficit does not fall below $500 billion through 2019, a level that officially was unthinkable before 2008.

Overly optimistic economic assumptions appear likely to limit the amount of stress that bank balance sheets will see in the current purported stress testing. Also, the tax and spending changes suggested in the budget package appear specifically to be unfriendly to business and economy activity.

These areas will be much more fully explored in the next newsletter. The financial markets, however, should be able to read through the fairy tales pretty quickly.

As Revised Annualized GDP Closes in on Reality, Annual Growth Still Is Shy of Same. While the revised annualized real (inflation-adjusted) fourth-quarter GDP contraction moved much closer to real-world experience, extreme overstatement of prior 2007 and 2008 GDP growth (including an understatement of the third-quarter 2008 contraction) still left the year-to-year contraction in real fourth-quarter GDP well shy of reality. While annual real fourth-quarter GDP growth was the weakest since annual GDP last turned negative in 1991, most comparative statements for other GDP measures and underlying economic series reflect the weakest growth patterns in 27 to 50 years. Accordingly, the July 2009 GDP benchmark revisions now are likely to show a much steeper pace of GDP decline in 2008 than currently reported.

Annualized Real GDP Still Weakest Since First-Quarter 1982. The Bureau of Economic Analysis’s (BEA) "preliminary" estimate revision of real annualized growth in the fourth-quarter 2008 GDP was a statistically-significant decline of 6.25% +/- 3% (95% confidence interval), following an initial estimate of a 3.80% contraction. Such was against a 0.51% downturn reported in the third quarter. In terms of year-to-year change, the fourth quarter contraction deepened in revision, down by 0.82%, versus initial reporting of a 0.18% contraction and versus the third quarter’s annual gain of 0.75%.

The revisions reflected higher GDP inflation, where the fourth-quarter GDP deflator showed prices rising at an annualized 0.51% in the fourth quarter, against the advance estimate of a 0.26% contraction. The higher the pace of inflation used in the deflation process, the weaker is the resulting "real" growth estimate. The GDP deflator indicated annualized third-quarter inflation of 3.88%. Significant downward revisions were seen in personal consumption expenditures, gross private domestic investment (largely lower inventories), and net deterioration in the trade deficit as reflected in the net exports account.

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 0.8% decline and 0.7% gain. Against reporting of underlying economic series, the annualized quarterly contraction likely was in excess of 7% for the fourth quarter, but the revised 6.2% estimate is the closest to reality reported by the BEA in a long time.

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; will not be published until the March 26th "final" estimate revision. Such is due still to significant lack of hard data and that the numbers are annual and more heavily relied on than partial-year data.

Nominal GDP Annualized Contraction Worst Since 1958.  With a relatively low fourth-quarter GDP inflation rate of 0.51% (previously a 0.26% contraction), the decline in real GDP was based on a contraction in nominal 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 5.77% (previously 4.05%), still 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 1.21% (previously 1.66%). That still was the weakest growth since first-quarter 1961, and was down from 3.31% in the third quarter.

Durable Goods Continued to Tumble.  The regularly-volatile new orders for durable goods continued collapsing on both a month-to-month and year-to-year basis in January, per the Census Bureau. January’s seasonally-adjusted monthly decline of 5.2% (7.4% net of revisions) followed a revised drop of 4.6% (previously 2.6%) in December. Before any accounting for inflation, January’s new orders were down by 26.4% from January 2008, against December’s revised 20.1% (previously 19.7%) annual decline. Adjusted for inflation the series would have shown even sharper contractions.

The widely followed new orders for nondefense capital goods fell by 2.7% (down 7.8% net of revisions) for the month of January, following December’s 10.2% (previously 5.9%) drop. Year-to-year, January orders were down by 31.4%, following a 25.6% decline in December.

Consumer Confidence Took Unusual Hit. Suggestive of a rapidly accelerating decline in economic activity, both the February 2009 consumer confidence numbers took heavy hits. In particular, the Conference Board’s Consumer Confidence measure, which already was at its lowest level in history (since the Lyndon Johnson Administration), plummeted by 33.2% for the month, and fell a record 67.3% year-to-year. January was down 3.1% (previously 2.3%) for the month and down 57.2% year-to-year. Year-to-year change for the three-month moving average was a record decline of 60.3%, versus a 54.6% fall in January.

The Reuters/University of Michigan’s Consumer Sentiment measure fell by 8.0% for the month of February, following a 1.8% increase in January. Year-to-year change in Sentiment was a decline of 20.5% for February, versus a drop of 21.9% in January. The three-month moving average was down year-to-year by 21.0%, versus a decline of 23.2% in January.

Where recent low-level stability may have reflected hopes for change with a new administration, the current readings suggest a significant shift to the downside in consumers’ views.  These lagging, not leading indicators confirm that the economy has taken a deepening hit in recent months.

Broad Money Growth Stalling Again? The latest monetary reporting by the Fed suggests the banking solvency crisis may be intensifying, once again. With two weeks-plus of some M3 components now available for February, slowing weekly growth in M2 and in institutional money funds are suggestive of some slowing growth in the SGS-Ongoing M3 Estimate. Unless there are sharp weekly pick-ups in the above mentioned accounts, and in estimates of large time deposits, year-to-year growth in monthly average M3 could slip back into the 10% to 11% range. After bottoming at 9.9% in November 2008, annual growth rose to an estimated 11.4% in December and 12.0% in January 2009. A first-cut estimate on February M3 will follow next weekend.

In the latest reporting of bank reserves and the monetary base, both total reserves and the monetary base rose, but the growth was in excess reserves, while required reserves fell. Annual growth patterns remained strong but were mixed in what can be volatile period-to-period reporting. In the two weeks ended February 25th, year-to-year change in the St. Louis Fed’s Adjusted Monetary Base (seasonally adjusted) rose to 88.4%, versus 81.9% in the prior two-week period. Annual growth in required reserves (not seasonally adjusted), however, slowed to 27.8% from 58.7% in the prior period. 

Week Ahead: Employment/Unemployment: Expectations (Briefing.com) are running around a 615,000 decline in February’s nonfarm payrolls (January was a loss of 598,000), with unemployment expected to rise to 7.9% from 7.6% in January. The report is due for release next Friday (March 6th). While the expectations are not unreasonable, the jobs loss could top 700,000.

February’s employment environment appears to have deteriorated versus January’s. Each of the indicators is a leading indicator to the employment/unemployment reporting. January newspaper help-wanted advertising hit another successive historic low, with a deepening annual fall-off in January online help-wanted advertising (Conference Board); new claims for unemployment insurance have continued to surge sharply, with the 17-week moving average up by 64.6% as of February 21st, versus 55.4% a month before; and employment readings continued in the deepest recession territories for both the January manufacturing and nonmanufacturing purchasing managers survey.

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