Expirations of One-Shot Programs Promise New Downlegs in Key Industries.  The broad economic data remain deep in recession territory, even with the temporary impacts from the cash-for-clunkers program and the first-time home-buyers tax credit running their courses. The clunkers program has expired, and given closing periods on home sales, so, too, has the bulk of the tax credit. With consensus estimates and related Wall Street and Administration hype having created irrationally-optimistic expectations for a near-term economic recovery, economic reports in the months ahead increasingly should disappoint expectations. 

The new orders for durable goods series has been bottom-bouncing at extremely low levels since the beginning of 2009, yet it still showed a 19% annual contraction as of August 2009. The housing industry has been in a longer and deeper slump, but housing starts also have been bottom-bounce at historic low levels of activity since last December. 

Even a careful reading of recent comments by the Federal Open Market Committee or Fed Chairman Bernanke picks up an underlying tone of economic bottom-bouncing, not recovery. With the expiry of the one-shot programs that provided any relative boosts to auto and home sales — pulling activity from future months into recent months — downlegs in the affected industries are likely to intensify anew. As discussed in the recent SGS Consumer Liquidity Special Report, consumers do not have the ability to expand GDP (dominated by personal consumption and housing investment), due to constrained income and credit. Intensifying employment problems (coincident, not lagging indicators to broad economic activity) continue here in something of a self-feeding, downward cycle.

The latest monetary numbers from the Fed suggest continued slowing of annual growth and continued monthly contraction in the broad money supply, which likely are indicative of intensifying systemic liquidity issues. Having the Fed push the monetary base to a record high in the most recent period does little to dispel suspicions of brewing crisis. 

August New Orders for Durable Goods Remained in Great Depression Territory. The Census Bureau reported this morning (September 25th) that the regularly-volatile new orders for durable goods fell by 2.4% (also down by 2.4% net of revisions) month-to-month, versus a revised 4.8% (was 4.9%) gain in July. In terms of year-to-year change, before any accounting for inflation, August’s new orders were down by 19.1%, following July’s revised annual decline of 20.0% (previously 20.4%). Adjusted for inflation the series would have shown even sharper contractions. 

From the series peak in 2006, the current order level is down by 28.6%, within great depression territory per SGS definition of a greater than 25% peak-to-trough decline in economic activity.  Since January 2009, the seasonally-adjusted series has flattened out at an extremely low level, averaging $160 billion per month. Against that, the August reading of $164.4 billion was within the normal range of volatility for reporting of this series. 

The widely followed new orders for nondefense capital goods also fell in August, down by 7.1% (down by 8.2% net of revisions) on a month-to-month basis, following July’s revised 7.0% (previously 8.6%) monthly gain. Year-to-year, August orders were down by 22.9%, versus a revised July annual decline of 21.3% (previously down by 21.2%). As to the "cash-for-clunkers" program impact on new orders for motor vehicles and supporting industries, whatever blip there was largely should have worked its way through the system. An initial monthly increase in motor vehicle orders of 0.9% in July was revised upward to 1.6%, with August orders up another 0.4%. Anecdotal evidence is strong for a lack of follow-through auto sales after August’s program-induced spike.     

These new orders series are leading indicators to economic activity and are not showing any pending economic rebound.

Housing Activity Continued Bottom-Bouncing in August. The Census Bureau reported on September 17th that housing starts rose month-to-month by a statistically insignificant 1.5% (up by 2.9% net of revisions) +/- 9.6% (95% confidence interval) in August. Such followed a revised 0.2% (previously 1.0%) monthly contraction in July. Year-to-year, August’s starts were down by 29.6%, following a revised annual contraction of 36.9% (previously 37.7%) in July.   

Annual contractions are moderating here and in a number of other series due to year-ago comparisons that were against extreme annual downturns at the time. Since December 2008, housing starts have been bottom-bouncing at an historically low level, averaging a seasonally-adjusted annual rate of 550,000. August’s reading of 598,000 was within normal monthly volatility.

New and existing home sales data remain very difficult to assess in terms of the implications for underlying economic activity. August reporting continued to be warped by a large portion of activity tied to foreclosures, and such is before an increasing number of new foreclosures are expected to hit the market. The National Association of Realtors (NAR) estimated 31% of August existing home sales were of distressed properties, with about the same portion of sales being attributed to those purchasers drawn into the expiring first-time-buyer tax credit. Accordingly, although the most recent reporting tended to disappoint market expectations, mounting foreclosures and the loss of tax-incentive-induced buying do not bode well for happy news in reporting of the months ahead.   

New residential sales in August rose by 0.7% (fell by 0.9% net of revisions) +/- 19.7% (95% confidence interval) and, once again, the monthly gain was not statistically significant. Such followed a revised 6.5% monthly increase (previously 9.6%) in July. Year-to-year, sales were down 3.4% in August, versus a 14.8% decline in July. Existing Home sales in August fell 2.7% month-to-month, following an unrevised 7.2% gain in July. Year-to-year, August sales were up by 3.4%, following a 5.0% gain in July.

Monetary Base at Historic High. In the last three two-week reporting periods, the Federal Reserve has spiked the monetary base by 9.6% (an annualized pace of 120.9%), reflecting a level of activity by the central bank not seen since the stock-market trough back in March. The St. Louis Fed’s Adjusted Monetary Base (seasonally adjusted) spiked to a record-high $1.837 trillion in the two-week period ended September 23rd, just topping the prior record high of $1.836 trillion seen in the two-week period ended May 20th of this year. Year-to-year growth in the latest period slowed to 93.5%, from 104.3% the prior period, as the year-ago comparison was against the first spiked period of the post-Lehman collapse.

The monetary base consists basically of currency in circulation plus bank reserves. Traditionally, it is the tool used by the Fed to address the money supply and broad systemic liquidity. Due to the extreme growth in excess reserves (a 14-fold increase over the year), the Fed’s largesse has not flowed through to bank lending in the normal stream of commerce, with the most-recent broad money growth continuing to slow on an annual basis and contracting on a weekly basis (if this changes as result of tonight’s banking data release, a further update shall follow over the weekend). These conditions remain suggestive of an intensifying systemic liquidity crisis.