FLASH UPDATE - September 12, 2009

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

September 12, 2009

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Annual Broad Money Growth Slowed Sharply in August

Fed’s Beige Book Generally Indicated Severe Bottom Bouncing

Irregular Cash-for-Clunkers Impact in
Pending Economic and Inflation Numbers

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PLEASE NOTE: The Consumer Liquidity Special Report should follow within a day or so (Sunday, September 13th is planned), assessing new details available on consumer income and liquidity conditions (they are not good news). The next planned Flash Update is for Tuesday, September 15th, following reporting of the August PPI and retail sales. A further update will follow on Wednesday, September 16th, following the August CPI and industrial production reports.

– Best wishes to all, John Williams

Solvency and Economic Crises are Ongoing. Despite extraordinary hype from Wall Street and the Administration that the recession is over and that all is right again with the banking and financial services system, strong evidence of ongoing and deepening crises continues, with the purported good news rarely more than fluff. 

No Rebound in Business Activity. The fluffy evidence for rebounding economic activity usually includes reporting of short-term period-to-period changes, where occasional seasonally-adjusted gains get touted beyond their statistical significance. Further, key data have been severely warped by the effects of the economic depression, with bankruptcies and effective bankruptcies (conservatorships, etc.) of large commercial and financial institutions such as General Motors and AIG, with high levels of foreclosures impacting home sales data, and with disruptions to normal commerce often skewing traditional patterns of activity beyond recognition in the seasonal-adjustment patterns so key to the significance of the regular month-to-month or week-to-week economic reporting process.

What rarely get coverage in the financial media are patterns of year-to-year change or levels of activity indicated by a given series. So far, the current economic downturn is the longest since the first downleg of the Great Depression in the early 1930s. Where year-to-year comparisons now are against severely negative patterns the year before, year-to-year percent declines have started to show some bottom bouncing, such as seen in retail sales and in housing, but there the level of activity has plateaued at extremely low, often at record low levels. These series are showing severe bottom-bouncing, not economic recovery.

Other series such as payroll employment and even the latest heavily politicized GDP reporting have continued to sink in terms of year-to-year growth, in both cases, despite their recent less-negative monthly and quarterly performances. 

Bottom-Bouncing per the Fed.  Consider the headline from the White House’s blog page, "Good News from the Beige Book." Touting that the Fed’s latest survey "indicated an improving economy," the White House went on to quote from major wire reporting, such as the Associated Press, where the AP lead indicated that the "recession is ending and the economy finally is growing again." The Fed’s report, however, was one that indicated primarily economic bottom-bouncing, not a growing economy. 

The opening comments of the Fed’s anecdotal Beige Book of September 9th (keep in mind there is a bias for a positive spin here, and period-to-period comparisons are not seasonally adjusted):

"Reports from the 12 Federal Reserve Districts indicate that economic activity continued to stabilize [bottom-bounce] in July and August. Relative to the last report, Dallas indicated that economic activity had firmed, while Boston, Cleveland, Philadelphia, Richmond, and San Francisco mentioned signs of improvement. Atlanta, Chicago, Kansas City, Minneapolis, and New York generally described economic activity as stable or showing signs of stabilization [bottom-bouncing]; St. Louis remarked that the pace of decline appeared to be moderating. Most Districts noted that the outlook for economic activity among their business contacts remained cautiously positive."

From Dallas, the one district with firming activity:

"Economic activity in the Eleventh District [Dallas] firmed somewhat over the past six weeks, with contacts in several industries suggesting a pickup in demand. [The only area discussed was electronics for automobiles, and likely was clunkers related]. Despite the slight improvement, several contacts expressed disappointment that conditions had not improved more. While outlooks are less gloomy than earlier in the year, most contacts are hesitant to predict a significant turnaround in the near term."

More typical were comments such as these:

"Construction-related manufacturers said orders held steady at extremely low levels [bottom-bouncing]. A few respondents noted disappointment that prior expectations of recovery had not been met. There has been a sluggish start to the ’shovel-ready’ projects covered under the stimulus plan, and funding has been slow to materialize. Most contacts expressed uncertainty in their outlooks as both residential and commercial construction activity remain depressed, and there is little evidence that conditions will improve in the near-term."

"Retailers report that consumers remain cautious, keeping overall sales flat at low levels [bottom-bouncing]. Value-based respondents noted sales were not as robust as expected given the back-to-school season."

Clunkers. As discussed in the Week Ahead section, below, the temporary effects of the government’s cash-for-clunkers automobile rebate program will surface in the economic releases of the week ahead, but any heavily puffed and fluffed positive impacts expected by consensus forecasters will be fleeting, and the positives even may prove to be less than expected. The program had little noticeable effect on July retail sales or on July new orders for durable goods, but it did help to spike the August purchasing managers manufacturing survey. There is some evidence that the auto sales induced by the rebates effectively just shifted retail sales activity away from other areas of the economy, while the best case is that resulting higher auto sales in July in August basically were sales borrowed from future months. 

As will be discussed in the Consumer Liquidity Special Report, government economic stimulus aimed at ending the current economic downturn generally is gimmicked to trigger occasional short-lived spikes in activity, with little aimed at attacking the structural problems tied to consumer liquidity that doom the current contraction to extreme depth and duration, extremes that have not been reached, yet.   

Continued Signals of Systemic Instability. The fluffy evidence for a healthy and stable financial system has been summarized by Treasury Secretary Geithner as being based on "a steady revival in the financial markets and in the economy [New York Times, September 11th]."  The economic revival is discussed above.  

As to the financial markets, recent weakness in the U.S. dollar and strength in gold might be suggestive of foreign investors being increasingly less willing to buy into the U.S. markets (with resulting downside market liquidity risk, upside U.S. interest rate risk as seen in 1987). Indeed, the stock market has been relatively strong, but it certainly it his heavily hyped and manipulated. Underlying economic fundamentals could not be much worse. Further, with regular bank loans to businesses and consumers in record contraction, with the broad money supply measures in monthly contraction, and with the Fed attempting to spike systemic liquidity with near-record growth in the monetary base, there are solid signals in place that the systemic solvency crisis once again may be intensifying, irrespective of the happy talk out of Treasury Secretary Geithner, President Obama and Fed Chairman Bernanke.

Monthly Data Show Slowing/Contracting Broad Money Growth. Confirming the indications in the September 2nd Alert, growth in broad money supply has continued to falter. With all Federal Reserve reporting in place for the month, the seasonally-adjusted monthly-average SGS-Ongoing M3 estimate for August showed annual growth slowing to 3.9% from 5.2% in July. Month-to-month, the decline was 1.1% in August, versus 0.4% in July, the first back-to-back monthly declines since October and November of last year.

Seasonally adjusted, year-to-year M1 growth rose to 18.5%, from 17.4% in July, but it declined month-to-month by 0.3%, after gaining 0.3% in July. Such was the first monthly decline since February. Monthly change in M1 can have something of a leading relationship to stocks prices. Year-to-year M2 growth eased to 7.9% in August from 8.1% in July. As with the M3 estimate, it contracted month-to-month for the second month, down 0.6% in August versus a 0.4% decline in July.

During the two years of the systemic solvency crisis, slowing annual growth rates, let alone month-to-month declines in the M3 estimate, have suggested an intensifying liquidity crisis, with Fed and/or Treasury action following in due course. The Fed has spiked the monetary base in the last two reporting periods.

The seasonally-adjusted St. Louis Fed’s adjusted monetary base jumped another 0.9% in the two weeks ended September 9th against the prior period, following a 5.5% surge in the two weeks ended August 26th. The latest level is within 1.8% of the record high level set in the April 22, 2009 week, with annual growth at 104.3%, up from 102.0% in prior period.

The monetary base remains the Fed’s primary tool for targeting money supply, but it has proven to be of limited impact in boosting money growth, where banks have been leaving their cash with the Fed instead of lending into the normal stream of commerce. Nonetheless, the Fed appears to be continuing to push here, with consumer and business credit extremely constrained — not a fully "revived" system.

Week Ahead. Producer Price Index (PPI). The August PPI is due for release on Tuesday (September 15th). The series is regularly volatile, but it should see some strong upside pressure from higher oil prices. The cash-for-clunkers program should have no direct impact on the results.

Consumer Price Index (CPI). The August CPI is due for release on Wednesday (September 16th). Consensus expectations have softened to a 0.3% monthly gain per Briefing.com.   Reporting risk is to the downside of expectations, due to clunkers pressures, but, even so, year-to-year inflation for August should be no worse than in July, with July/August setting the trough in the annual CPI inflation rate for the current cycle.

Given higher gasoline prices and favorable seasonal factors, a stronger-than-consensus number would be in the works, but for the cash-for-clunkers program. Despite dealers (in theory) receiving full cash payment for the consumers’ government rebates, as should be reflected in retail sales reporting; and despite some states assessing sales tax on those rebates; and despite the clunkers turned in by consumers having some monetary value; the Bureau of Labor Statistics will reduce the prices of new automobiles in the August CPI for the rebates. The impact of this reporting could be enough to knock 0.3% off the monthly CPI, although it should reverse in September?

Allowing for an unchanged monthly CPI in August 2009, the year-to-year CPI inflation rate still would be around July’s level. Annual inflation would increase or decrease, dependent on the seasonally-adjusted monthly change, versus the "flat" (0.02% decline) adjusted monthly change seen in August 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 July’s annual inflation rate of negative 2.10%.

Retail Sales. August retail sales data are due for release on Tuesday (September 15th). Consensus expectations, per Briefing.com, are for a 1.9% monthly increase, of which 1.5% would be attributed to auto sales. Reporting risk is to the downside of expectations, given evidence of heightened auto activity taking sales away from other areas of the retail trade. Net of consistent adjustment for inflation and any temporary blip from the clunkers program, retail sales should continue a pattern of bottom-bouncing.

Industrial Production. August industrial production is due for release on Wednesday (September 16th). Expectations also are at some risk of disappointment here, given a lack of follow-through auto sales and continued cooler-than-usual weather depressing utility usage and production measures indexed to utility activity. The series likely will continue bottom-bouncing, other than any temporary clunkers blip.  

Housing Starts. August housing starts detail is due for release on Thursday (September 17th). The series should continue to show bottom-bouncing at a low-level plateau, with reported seasonally-adjusted month-to-month change likely to lack statistical significance.

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