JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

July 15, 2009

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Inflation Accelerates (Annualized June Rate of 9.3%)

June CPI-U Annual Deflation of 1.4%
Versus SGS-Alternate Estimate of 6.1% Inflation

Quarterly Production and Real Retail Sales Contractions
Confirm Ongoing Recession

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 PLEASE NOTE: The next posting should be the full SGS Newsletter, within the next several business days. Any interim Flash Update or Alert would be published as dictated by developing economic or financial-market circumstances.

– Best wishes to all, John Williams

 Ongoing Recession and Inflation. On the economic front, quarterly contractions continued in key series. Annualized quarter-to-quarter change (the way headline GDP growth is reported) was negative for both industrial production and real (inflation-adjusted) retail sales. The contraction in second-quarter industrial production was 11.6%, versus a 19.1% contraction in the first quarter. The contraction in real second-quarter retail sales was 3.0%, versus a 3.1% contraction in the first quarter. While recent GDP reporting never fully reflected what was happening in these underlying series, upcoming benchmark revisions should show the current downturn to have been much longer and deeper than has been reported, so far. A narrowing quarter-to-quarter contraction but a deepening year-to-year downturn are fair bets for the gimmicked second-quarter GDP "advance" estimate, due for release on July 31st, along with the benchmark revisions.

On the inflation front, annualized quarter-to-quarter change in the CPI-U rose to 3.3% in the second quarter, from 2.2% in the first quarter. The annualized seasonally-adjusted inflation rate for June was 9.3%.

Oil Price Gyrations Promise Higher Inflation Ahead. The slight upside reporting surprise (0.7% versus 0.6% consensus per Briefing.com) in the June CPI was not enough to reverse the slide in the declining year-to-year change in the CPI-U, but it slowed it. There were quirks in the reporting. The downward trend in the annual decline in the Chain-Weighted CPI-U (C-CPI-U) actually reversed, so that the C-CPI-U now shows less-negative annual inflation than the CPI-U. Also, unusual distortions in the monthly seasonal adjustments suggest the seasonally-adjusted CPI-U should have risen by 0.8% instead of the reported 0.7%.

Irrespective of unusual number crunching in the latest reporting, ongoing shifts in oil prices promise higher reported inflation in the months ahead. While oil prices have pulled back some in July, and gasoline prices have backed off their late-June highs, such also happened last year. Oil hit a record-high closing price of $145.66 on July 11, 2008 (West Texas Intermediate spot closing price), and the ensuing price collapse has muted inflation reporting ever since. Although oil is off its recent near-term highs, it likely does not face the relative magnitude of losses seen in the last half of 2008. With heavy selling pressure on the U.S. dollar still in the offing, a general upside pressure on dollar-denominated oil prices also should be seen in the months ahead. As a result, stronger relative year-to-year performance in oil prices and related energy costs would tend to spike year-to-year inflation measures. Where the regular seasonal adjustments that have reduced the impact of rising gasoline prices in recent months largely washed out in June, they will spike monthly inflation in the next several months, even in the absence of significant gasoline price increases.

 CPI-U.  The Bureau of Labor Statistics (BLS) reported this morning (July 15th) that the seasonally-adjusted June CPI-U (Consumer Price Index for All Urban Consumers) rose by 0.74% (up by 0.86% unadjusted) +/- 0.12% (95% confidence interval not seasonally adjusted) for the month, versus a gain of 0.10% (up by 0.29% unadjusted) in May.  Unadjusted year-to-year inflation declined further (formal deflation), down by 1.43% +/- 0.20% (95% confidence interval) in June, versus a 1.28% contraction in May. 

The reported June CPI-U year-to-year decline was largest since January 1950.  I estimate, however, that CPI reporting methods used in 1950 would generate a reported current inflation rate of roughly 6% (see Alternate Consumer Inflation Measures below).

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 July 2009 reporting, dependent on the seasonally-adjusted monthly change, versus the 0.72% adjusted monthly increase seen in July 2008.  I use the adjusted change here, since that is how consensus expectations are expressed. The difference in growth would directly add to or subtract from June’s annual inflation rate of negative 1.43%. Annual CPI-U should be near or at its trough for the current cycle, with accelerating upticks in annual inflation likely starting in the next month or two.

CPI-W.  The BLS reported that the narrower, seasonally-adjusted June CPI-W (CPI for Urban Wage Earners and Clerical Workers) rose by 0.92% (1.05% unadjusted), following a 0.13% (0.41% unadjusted) increase in May.  Year-to-year, CPI-W inflation declined by 1.98% in June, following a 1.89% decline in May.

C-CPI-U.  Year-to-year or annual inflation for the Chain Weighted CPI-U — the fully substitution-based series that gets touted by CPI opponents and inflation apologists as the replacement for the CPI-U — fell by 1.26% in June, versus a 1.38% decline in May. The narrowing of the annual negative inflation rate and a less-negative annual inflation rate than shown in the CPI-U suggest reporting problems within the various CPI series.   

Alternative Consumer Inflation Measures. Adjusted to pre-Clinton (1990) methodology, annual CPI growth eased to roughly 1.9% in June versus 2.0% in May, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, held even or softened slightly at about 6.1% (6.05% for those using the extra digit), versus 6.1% (6.15% with a rounding difference to the first decimal point) in May. The new numbers have been updated on the Alternate Data tab and Inflation Calculator at www.shadowstats.com.  The alternative numbers are not adjusted for any near-term manipulations of the data.

The SGS-Alternate Consumer Inflation Measure adjusts on an additive basis for the cumulative impact on the annual inflation rate of various methodological changes made by the BLS. Over the decades, the BLS has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that no longer reflects the constant-standard-of-living concept. Roughly five percentage points of the additive SGS adjustment reflect the BLS’s formal estimate of the impact of methodological changes; roughly two percentage points reflect changes by the BLS, where estimated impact has not been published by the BLS.

Real Retail Sales.  Updating the July 14th Flash Update, inflation- and seasonally-adjusted June retail sales declined by 0.09% (up by 0.65% before inflation adjustment) for the month, versus a revised 0.37% (previously 0.36%) gain in May (up by 0.47% before inflation adjustment). Year-to-year, June real retail sales fell 7.89% (8.99% before inflation adjustment), versus a revised 8.83% (previously 8.63%) decline in May, which was a drop of 9.75% before inflation adjustment.

Smoothed for monthly volatility on a three-month moving-average basis, the June and May real annual declines were 8.73% and 9.13%, respectively. Since December 2008, annual decline in the moving average has held around 9%, a record low for the two historical retail series of the post-World War II era. The pattern here of annual growth leveling off at an historically low level is being repeated in other series, such as housing starts. Such reflects the effects of a protracted period of economic decline, not a turnaround in economic activity.

Depression in Industrial Production Continues. The Federal Reserve reported that seasonally-adjusted June industrial production fell by 0.4% for the month, after a revised 1.2% (previously 1.1%) decline in May.  Year-to-year contraction in activity deepened to 13.6% in June from the revised 13.5% (was 13.4%) tumble in May. Such set a new record low for annual production growth since the shutdown of war-time production after World War II.

With annual change down 13.6% and with a peak-to-trough (June is the short-lived current trough) contraction at 15.1%, the industrial sector of the economy (including manufacturing, mining and utilities) continued in depression. A depression is defined (SGS) as a recession where the peak-to-trough economic contraction exceeds 10%.

As previously noted, since the index of industrial production was introduced in 1919, there have been four down cycles worse than what has been seen so far in the current downturn. In each instance, the trough reflected an annual decline somewhat in excess of 30%. Those four cycles were: (1) the post-war production shut-down following World War II; (2) and (3) the double dip of the Great Depression; (4) the post-World War I and post-Panama Canal production shutdowns in the early 1920s.

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