JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

June 25, 2009

__________

GDP Revisions Little More Than Statistical Noise
But Watch Out for July 31st Benchmark Revisions

Annual Plunge in Durable Goods Orders Continued

Worst of the Downturn Still is Ahead
__________ 

 

 PLEASE NOTE: Other than a brief update to the jobs outlook on Monday or Tuesday (June 29th or 30th), the next Flash Update is planned for Thursday, July 2nd, following the release of the June employment/unemployment data. Any other interim Flash Update or Alert would be published as dictated by developing economic or financial-market circumstances.

– Best wishes to all, John Williams

 

Weak Year-Ago Numbers Make Annual Comparisons Look a Little Better. A number of series have started to show some flattening of year-to-year decline, albeit at record low levels. Such can be seen in housing starts, retail sales, durable goods orders and new claims for unemployment insurance, for example. This is the nature of looking at collapsing series, when year-to-year comparisons start going against periods of intense collapse the year before. There still is no signal for rebounding economic activity, only bottom bouncing at historic lows. Even minor relative upturns in annual change are mathematical artifacts of an economy in ongoing decline; they do not reflect an upturn in activity.    

GDP Revisions Were Minimal. This morning’s (June 25th) "final estimate" revision to first-quarter 2009 gross domestic product (GDP) was no such thing. On July 31st, the Bureau of Economic Analysis (BEA) will revamp GDP history going back to 1929. The pending revisions will be discussed in the Reporting/Market Focus of the upcoming newsletter (planned within the next couple of weeks). Generally, weaker than previously reported economic activity should surface in the "corrected" data, showing declining quarterly real (inflation-adjusted) GDP that is more coincident with the official recession call by the National Bureau of Economic Research (NBER), which dates the onset of the downturn to December 2007. At present, reported GDP began contracting in third-quarter 2008. Assuming historical benchmarking patterns are repeated, methodological changes will tend to increase the relative strength and size of earlier historical GDP data.       

Less-Negative Inventory and Trade Changes Give GDP Minimal Relative Boost. The BEA reported the "final" estimate revision of first-quarter 2009 GDP showed an annualized quarterly real (inflation-adjusted) contraction of 5.49% +/- 3% (95% confidence interval), narrowed minimally from the "preliminary" estimate of a 5.72% contraction and the "advance" estimate of a 6.14% contraction. Year-to-year change revised to a decline of 2.45%, from the "preliminary" 2.51% and the "advance" 2.62% contractions. The latest first-quarter contraction rate followed a reported annualized 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 fourth-quarter saw a contraction of 0.84%, following a gain of 0.75% in the third quarter. The first quarter’s annual contraction was the deepest since the third quarter of 1982, while the third-consecutive quarterly contraction was the longest string of consecutive quarterly declines since the 1973/1975 recession. 

The minimal revisions to the data included another increase (less-negative change) in business inventories. Higher than expected inventories often are unwanted and usually lead to production cutbacks and lower future GDP growth, although, once again, the changes and revisions here were not that large. Also the net export account was less negative in revision, despite recent trade data revisions that showed a weaker, not stronger, trade circumstance. Recent downside revisions to key indicators of economic activity generally should be reflected in the upcoming benchmark revisions.

The first-quarter GDP inflation rate (GDP deflator) eased back, again, in revision to an annualized 2.77%, from the "preliminary" 2.80% and the 2.85% in initial reporting. 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 2.5% 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 Also Showed Minor Upside Revision. The annualized decline in nominal GDP — GDP not adjusted for inflation, reflective of the way companies book actual sales volume — revised to 2.87%, versus the "preliminary" 3.08% and "advance" 3.47% declines. Such followed a 5.77% annualized contraction in the fourth quarter (the relative improvement reflected higher inflation — see deflator comments above). As noted in prior comments, for the first time since the severe impact of a steel strike in 1957 and 1958, nominal GDP declined for a second consecutive quarter. Year-to-year change in nominal GDP turned negative in the first quarter, down a revised 0.38%, versus earlier estimated contractions of 0.43% (preliminary) and 0.53% (advance). This was the first annual contraction since the second quarter of 1958. Annual growth in fourth-quarter 2008 was a positive 1.21%.     

GDP-Like Measures Revised.  Revised estimates of the BEA’s GDP-like measures for first-quarter 2009, Gross National Product (GNP) and Gross Domestic Income (GDI), were released with this morning’s report.

GNP is the broadest measure of U.S. economic activity (GNP is GDP plus trade in factor income, or interest and dividend payments). First-quarter GNP was reported showing a revised annualized real quarterly contraction of 5.62% (was 5.72%), still deepening slightly versus the fourth-quarter estimate of a 5.59% contraction. Year-to-year, first-quarter GNP declined by a revised 2.38% (was 2.42%), versus a 0.93% contraction in the fourth quarter.

GDI is the income-side equivalent of the GDP’s consumption estimate. As estimated in last month’s reporting, reflecting a sharp reversal in "statistical discrepancy," first-quarter GDI was reported showing an annualized real quarterly contraction of 3.64%, versus a fourth-quarter estimated contraction of 7.78%. Today’s reporting and revision reflected something of a reversal in other trends, showing a deeper 4.31% annualized quarterly contraction in the first quarter. Year-to-year, first-quarter GDI declined by 3.11% (previously down 2.94%), versus a 2.16% contraction in the fourth quarter.

Annual Change in New Orders for Durable Goods Remains in Historic Plunge. Continuing the general pattern of downside revisions to prior reporting by the Census Bureau, the regularly-volatile new orders for durable goods rose by 1.8% (up 1.5% net of revisions) month-to-month in May. Yesterday’s (June 24th) May data followed a revised 1.8% (previously 1.9%) monthly increase in April. In terms of year-to-year change, before any accounting for inflation, May’s new orders were down by 24.5%, following April’s revised annual decline of 26.9% (previously 26.6%). Adjusted for inflation the series would have shown even sharper contractions. Year-to-year change in the series has been holding at a 25% decline, plus or minus a percent or two, since February, having pushed into great depression territory, per SGS definition of a greater than 25% peak-to-trough decline in economic activity.  

The widely followed new orders for nondefense capital goods rebounded in May with a 10.0% (8.8% net of revisions) monthly gain, after falling by a revised 2.9% (was 2.0% in April). Year-to-year, May orders were down by 28.6%, versus a revised April annual decline of 36.2% (previously down by 35.5%).

Home Sales Also Remain in Annual Plunge. With housing starts holding at a record 50% annual contraction, new home sales are not doing much better. The Census Bureau and HUD reported yesterday (June 24th) that May new home sales were down by a statistically insignificant 0.6% (down by 2.8% net of revisions) +/- 21% (95% confidence interval) for the month, following a revised 2.7% (previously 0.3%) increase in April. May homes sales declined by 32.8%, following a revised 35.5% (previously 34.0%) decline in April.

The National Association of Realtors (NAR) estimated that 33% of existing home sales in May (down from 45% in April and down from somewhat more than 50% in March) were distressed (in foreclosure). Such still makes the reported 2.4% monthly gain and 3.6% annual decline in the May sales difficult to assess related to underlying economic activity. There is no easy way to estimate what portion of the foreclosed properties would have otherwise translated into normal home sales, had the forced sales not been present in the market. Safely, the net annual pace of decline would have been much steeper. The NAR also noted a significant problem with pending home sales not closing, due to appraisals coming in too low to support needed financing.

Week Ahead.  June Employment/Unemployment. Due for release on Thursday, July 2nd, the May employment situation should show some widening in monthly payroll loss (345,000 loss reported in May) and further deterioration in the unemployment rate (9.4% in May). Jobs loss should rebound to more than 500,000, but that remains hostage to a difficult financial-market and political circumstance. I have not seen published consensus expectations, yet, but they likely will be consistent the "recovery has started" hype. With little new in related underlying series, I shall put out a quick update on this pending release on Monday or Tuesday of next week.  

 ________