FLASH UPDATE - August 13, 2009

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

August 13, 2009

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July Retail Sales Continued Historic Bottom-Bouncing

Monthly "Core" Retail Sales Gained 0.22% versus Aggregate 0.05% Contraction

12-Month "Official" Federal Deficit Topped $1.3 Trillion,
Gross Federal Debt Up $2.1 Trillion

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PLEASE NOTE: The next Flash Update is planned for tomorrow, Friday (August 14th), following the CPI and industrial production releases.

– Best wishes to all, John Williams

July Retail Sales Notched Lower Despite Inflation and Cash-for-Clunkers. This morning’s (August 13th) Census Bureau report indicated a statistically-insignificant monthly decline of 0.05% (a gain of 0.05% net of revisions) +/- 0.6% (95% confidence interval) in seasonally-adjusted July retail sales. Such followed a revised 0.77% (previously 0.65%) monthly gain in June. On a year-to-year basis, July retail sales fell by 8.31%, versus a revised 8.92% (previously 8.99%) plunge in June. This pattern of annual change remains one of bottom-bouncing/plateauing at historic low levels.

What is not clear at the moment is how the pricing of automobiles in the cash-for-clunkers program will be handled in the government’s economic bookkeeping. Are the added discounts to be treated as lower automobile prices or as transfer payments from the government to the involved individuals or automobile dealers? While handling such as transfer payments seems appropriate, the matter now is complicated by government ownership in and control of General Motors.

Core Retail Sales.  Consistent with the Federal Reserve’s predilection for ignoring food and energy prices when "core" inflation is lower than full inflation, "core" retail sales — retail sales net of grocery store and gasoline station revenues — rose by 0.22% (0.25% net of revisions) in July, following a revised 0.23% (previously 0.26%) increase in June. Those numbers contrasted with the official aggregate loss of 0.05% in July and gain of 0.77% in June. Although gasoline prices declined on average in July, they were higher in June and are rebounding anew, so far, in August. Seasonal adjustments in July and August should have spiked July reporting and should further spike the August numbers.    

Real Retail Sales.  Inflation- and seasonally-adjusted June retail sales likely were little changed on a monthly basis and remained sharply lower in terms of annual contraction. Those numbers will be detailed in tomorrow’s Flash Update, following the release of the July CPI. The July CPI-U currently is expected to be unchanged for the month, per Briefing.com (see comments below).

June Trade Deficit Should Not Generate Significant GDP Revisions. Yesterday (August 12th), the Census Bureau and Bureau of Economic Analysis reported that the seasonally-adjusted June trade deficit widened to $27.0 billion from an unrevised $26.0 billion in May. Exports picked up by less than imports. Oil imports jumped based both on higher oil prices ($59.17 average per barrel in June versus $51.21 in May) and on higher physical volume (9.3 million barrels per day in June versus 8.4 million in May). The first estimate of trade balance activity for the third month of the second quarter was not different enough from consensus estimates to have meaningful impact on the upcoming first revision to estimated second-quarter GDP growth.

Distorting current trade data appear be ongoing systemic disruptions from merchandise flows affected by the auto industry’s reorganization. Also, as was seen in 2008 reporting, significant distortions from less than timely paperwork flows likely is affecting results, again. An import transaction is tallied as of the month that the paperwork makes it into the trade data reporting, not when the import actually occurs. While revisions are made regularly for one month back in time, last year’s reporting showed significant lags (more than one month) that caused a large negative revision to 2008 reporting.  

For 12 Months Ended July, Federal Deficit Topped $1.3 Trillion; Debt Gained $2.1 Trillion. Understated by accounting gimmicks used to mute the impact of the banking bailout program, the 12-month moving deficit through July 2009 was $1,333.1 billion, versus $1,255.2 billion in June, $1,127.3 billion in May and $1,103.6 billion in April. Those numbers contrasted with 12-month rolling deficits for July, June, May and April 2008, respectively, of $375.5 billion, $309.2 billion, $332.5 billion and $334.2 billion.

Accounting changes introduced in April reduced the reporting of outlays for the government’s banking bailout program and continue on an ongoing basis. Before restatement for the new accounting gimmicks, April’s 12-month moving deficit was $1,278.6 billion, instead of the now-estimated $1,103.6 billion. Net of that gimmick, the current 12-month moving deficit would top $1.5 trillion. 

Viewing the change in the level of gross federal debt bypasses most of the regular reporting manipulations of the government’s financial results and provides a better indicator of actual net cash outlays by the federal government than does the official deficit reporting. Gross federal debt stood at $11.669 trillion as of July 31, 2009, up by $124 billion for the month, and up by $2.084 trillion from July 2009, which in turn was up by $653 billion from July 2007. The Treasury expects borrowing to break the current $12.1 trillion debt limit in October. 

Gross federal debt stood at $11.545 trillion as of June 30, 2009, up by $224 billion for the month, and up by $2,053 billion from June 2008, which in turn was up by $634 billion from June 2007. Gross federal debt stood at $11.322 trillion as of May 31, 2009, up by $83 billion for the month, and up by $1,933 billion from May 2008, which in turn was up by $560 billion from May 2007. As of the end of September 2008, the close of the government’s last fiscal year, gross federal debt stood at $10.025 trillion, up $379 billion for the month and up by $1.017 trillion from September 2007, which in turn was up $501 billion from September 2006.

As noted in the most recent newsletter, fiscal stresses are going remain severe in the next several years, given the Obama Administration’s budget and economic stimulus package boosts to government outlays, and given the sharp hit on tax receipts from the continuing, severe recession.

The official 2008 federal deficit was $454.8 billion, against a $161.8 billion deficit in 2007. These are the officially-gimmicked numbers (counting Social Security revenues, but not liabilities, not fully counting the costs of the Iraq War, etc.), using a variation on cash-based accounting, not GAAP reporting. The 2009 official budget deficit should top $2 trillion, with commensurate funding in excess of that required by the U.S. Treasury.

The 2008 GAAP-based deficit (counting unfunded Social Security and Medicare liabilities, etc.), using accrual accounting, was $5.1 trillion, up from $1.2 trillion ($4 trillion-plus, using consistent annual assumptions and accounting) in 2007. The 2009 GAAP-based deficit likely will top $9 trillion (more than 60% of annual U.S. GDP).

Irrespective of wishful pronouncements by the FOMC, rapidly increasing market reluctance to hold U.S. Treasuries eventually will pummel the U.S. dollar and force heavy Fed monetization (overt or covert) of the Treasury’s soaring obligations, along with dire consequences for broad money growth and domestic inflation.

Tomorrow’s Reporting. The following generally is repeated from the August 7th Flash Update:

July Consumer Price Index (CPI). Due for release on Friday (August 14th), July CPI-U is expected to be unchanged per Briefing.com, but despite dips in monthly average oil and gasoline prices, there is some upside risk against market expectations.

Given the significant reversal in seasonal factors that now will spike energy inflation sharply in the third quarter, and given rising relative year-to-year comparisons against last year’s collapsing oil prices (July excepted), July CPI inflation and monthly inflation the next several months should offer upside surprises to consensus expectations. Longer-range impact from likely intensified dollar weakness, a likely continued upswing in oil prices and an eventual upturn in broad money growth should tend to generate upside CPI pressures well into 2010.

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.  The difference in growth would directly add to or subtract from June’s annual inflation rate of negative 1.43%.

July Industrial Production. Also due for release on Friday (August 14th), July industrial production may be spiked by poor-quality seasonal factors, warped by auto industry disruptions as seen in the July employment/unemployment numbers and the purchasing managers manufacturing index. Unusually cool weather, however, could offset such distortions to a certain extent, where utility activity could decline and that would reduce estimates of production that are based on electricity consumption. Beyond near-term monthly volatility, annual growth should continue at or close to historic lows.

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