FLASH UPDATE - April 29, 2009

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

April 29, 2009

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Not Adjusted for Inflation,
Annual GDP Decline Is First Since 1958

Adjusted for Inflation,
Annual Decline in Gimmicked GDP Falls to 1982 Levels

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PLEASE NOTE: The next planned Flash Update will follow the release of the April employment report on Friday, May 8th. There well may be an intervening Flash Update or Alert, depending on financial-market or political developments.

– Best wishes to all, John Williams

Real GDP Contracts for Third Consecutive Quarter. First-quarter 2009 GDP was reported down by 6.14% annualized quarter-to-quarter, down 2.62% year-to-year. In the longest string of consecutive quarterly declines since the 1973/1975 recession, the Bureau of Economic Analysis (BEA) reported the "advance" estimate of real (inflation-adjusted) annualized growth for first-quarter 2009 gross domestic product (GDP) tumbled 6.14% +/- 3% (95% confidence interval). Such followed a reported decline of 6.34% in fourth-quarter 2008 and a 0.51% contraction in the third quarter. In terms of year-to-year change, the real first-quarter GDP declined by 2.62%, versus a fourth-quarter contraction of 0.84%, and a gain of 0.75% in the third quarter. The first quarter’s annual contraction was the deepest since the third quarter of 1982.

As the "advance" estimate for the quarter, today’s (April 29th) report was based on roughly 90% guesstimated data. Underlying assumptions would have been targeted at the more-optimistic consensus expectations, so it is likely that the "advance" number understated the depth of the downturn and that it will suffer negative revisions in the months ahead.

The annualized real changes in certain GDP components were unusual, as often is the case. Personal consumption, for example, rebounded by 2.1%, following a 4.3% contraction in the fourth quarter. Yet underlying reporting (i.e., retail sales) suggested ongoing quarterly contraction. 

Also on the plus-side was a small improvement in net exports. Offsetting the gains were sharp declines in business investment (including inventories) and housing, and a short-lived drop in government spending.

The first-quarter GDP inflation rate (GDP deflator) surged at an annualized 2.85% pace, reflecting dropping oil prices (which get counted as a double-negative, or a positive, with imports being subtracted from GDP). Such contrasted with a 0.61% increase in the fourth quarter and a 3.88% inflation rate in the third quarter.

Based on removal of the effects of some reporting gimmicks and unfortunate methodological changes of recent decades, the SGS-Alternate GDP estimate for first-quarter 2009 is for an annual (not annualized) contraction of roughly 5.1% versus a 4.1% contraction in the fourth quarter, against official respective annual estimated declines of 2.6% and 0.8%. Against reporting of underlying economic series, the annualized quarterly contraction likely was in excess of 8% for the first quarter. Nonetheless, GDP reporting remains virtually worthless and is little more than political propaganda.

Nominal GDP Contracts for Second Consecutive Quarter. For the first time since the severe impact of a steel strike in 1957 and 1958, nominal GDP — GDP not adjusted for inflation, reflective of the way companies book actual sales volume — declined for a second consecutive quarter. The annualized decline was reported at 3.47%, following the fourth quarter’s 5.77% contraction (the relative improvement reflected higher inflation — see deflator comments above). Year-to-year change in nominal GDP turned negative in the first quarter, down 0.53%, for the first time since the second-quarter of 1958. Annual growth in the fourth quarter was 1.21%.      

Pending GDP. GDI and GNP Release Due Next Month: The BEA’s GDP-like measures for first-quarter 2009; 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 estimated until next month’s release, due to the usual unreliability of the data compiled for the "advance" estimate.

Major GDP Benchmark Revision Scheduled:The BEA plans a grand benchmark revision on July 31st, along with the "advance" estimate of second-quarter GDP. The revisions will include the introduction of new methodologies. The pending changes will be assessed shortly. What remains likely is that recent economic history — as reported for the GDP — should appear to have been relatively weaker than initially published. Minimally, the new data should reflect quarterly GDP contractions that go back to at least first-quarter 2008, consistent with the National Bureau of Economic Research’s timing of the current recession.   Further back in time, however, prior history back to 1929 likely will be revised higher, reflecting the "benefits" of new methodologies. 

Week Ahead.  Employment/Unemployment: The April employment report is due for release next Friday (May 8th). The outlook remains as discussed in the most recent newsletter. With continuing deterioration in underlying economic activity, the April payroll survey should plunge again, by more than 700,000 jobs, along with a further spike in the unemployment rate. Political/financial-market considerations, however, might favor actual reporting that is somewhat more positive than whatever the consensus outlook is a week before the release.

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