JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

April 27, 2009

__________

"Adverse" Stress Test Assumptions Close to Standard CBO Projections

Economy Is Not in Recovery

More than Half of Existing Home Sales Are "Distressed"

__________

PLEASE NOTE: The next planned Flash Update will follow the release of the "advance" estimate of first-quarter 2009 GDP on Wednesday, April 29th.

– Best wishes to all, John Williams

While the broad outlook remains unchanged, as discussed in most recent newsletter (No. 50), a couple of developments during the last week have had or may have some impact on both the economy and the financial markets. Stories of China building up its gold reserves and renewing its call for an overhaul of the U.S. dollar’s reserve currency status appear to have had some positive impact on gold prices and negative impact on the foreign exchange value of the U.S. dollar. Continued prodding of the U.S. dollar by China likely will accelerate the process of other major U.S. trading partners moving to abandon their dollar support.  The fate of the greenback and the timing of the loss of global confidence in it remain key to the timing of resurgence in U.S. consumer inflation.

Beyond the potential human tragedy, the unfolding story of a possible swine-flu pandemic could hit economic activity hard. If the perceived threat to public health becomes severe enough, it quickly could impact the normal course of commerce, particularly in terms of travel and conditions where heavy person-to-person contact is usual, including day-to-day operations of many businesses. Even with a minimal threat, there likely will be ongoing heavy media coverage over the near-term, and such tends to slow personal consumption, as people sit at home watching television instead of going out to the malls to shop. Such also might provide some temporary distraction for the public from the still-mounting economic and financial system woes.

As discussed in the sections below, other circumstances surrounding the broad economic outlook and the systemic solvency crisis have not improved  

Stress Tests Were Not Too Stressful.  The Federal Reserve published on Friday (April 24th) the economic assumptions used in stress-testing the capital adequacy of U.S. banks. The "adverse" assumptions used for the process, however, were not particularly adverse. For example, the assumptions all had some form of recovery in 2010, instead of allowing for ongoing economic contraction.

The upfront numbers for 2009 are the most important in terms of current stresses on the banks. The baseline numbers were based on various consensus forecasts, which usually are of minimal value in times of recession. Moreover, the "alternative more adverse" numbers for the stressing were close to the current "baseline" projections already bring used by the Congressional Budget Office (CBO). As with the consensus numbers, CBO estimates tend to be overly optimistic.

Specifically, the stress testing used a baseline 2009 GDP contraction of 2.0%, with an "alternative more adverse" circumstance of a 3.3% contraction. The CBO is projecting a 2009 contraction of 3.0%. The stress testing used a baseline 2009 unemployment rate of 8.4%, with an "alternative more adverse" circumstance of 8.9%. The CBO is projecting a 2009 unemployment rate of 8.8%.

It is not likely that the stress-testing process here came close to assessing the existing or potential capital needs of the various banks involved in the process.

Home Sales Remain in Trouble. Seasonally-adjusted March new home sales were reported by the Census Bureau to have eased month-to-month by 0.6% (up by 5.6% net of revisions) +/- 22% (95% confidence interval). Such followed a revised 8.2% (4.7%) gain February. Year-to-year, March sales fell by 30.6%, versus a revised 37.4% (previously 41.1%) in February.

The highly volatile new home sales series (the recently reported small monthly changes are not statistically significant) may be suffering some seasonal factor distortions. Year-to-year contraction remains severe. 

Seasonally-adjusted March existing home sales were reported by the National Association of Realtors (NAR) as down by 3.0% (3.2% net of revisions), after a revised 4.9% (previously 5.1%) gain in February. Year-to-year, March sales fell by 7.1%, following a 4.8% (previously 4.6%) annual contraction in February.

The existing home sales series is heavily skewed by foreclosures, which do not reflect normal supply and demand circumstances. The NAR estimated that more than half the March sales were "distressed," which was up from an estimate of 40% to 45% of sales in February. Such indicates an ongoing, severely troubled housing circumstance.

New Orders for Durable Goods. Continuing a pattern of downside revisions to prior reporting by the Census Bureau, the regularly-volatile new orders for durable goods fell by 0.8% (by 2.6% net of revisions) month-to-month in March. Such followed a revised 2.1% (previously 3.4%) monthly gain in February. In terms of year-to-year change, before any accounting for inflation, March’s new orders were down by 23.9%, following February’s revised record annual decline of 29.7% (previously 28.9%). Adjusted for inflation the series would have shown even sharper contractions.

The widely followed new orders for nondefense capital goods rose by 1.9% (down by 1.5% net of revisions) in March, following a revised 4.9% (was 7.4%) in February. Year-to-year, March orders were down by 29.4%, following a revised annual decline in February of 37.4% (previously 35.5%).

Week Ahead: GDP. Expectations for the "advance" estimate of annualized real (inflation-adjusted) growth in the first-quarter GDP appear to be favoring a less severe pace of contraction than was seen in the fourth quarter. Such also happily would coincide with the developing market hype that the economy is turning. Briefing.com reports a consensus estimate of a 4.9% annualized contraction versus the "final" estimate of a 6.3% contraction in the fourth quarter. The GDP estimate at the "advance" level is around 90% guesstimate and at least is targeted partially at consensus forecasts.

Aside for some boost from government spending and minor improvement in net exports, most of the first-quarter GDP components should be in contraction. Based on the patterns of deepening annual contraction for the broad payroll and industrial production series, which tend to be coincident with the GDP, the first-quarter’s contraction should be more severe than the fourth-quarter’s (see SGS Newsletter No. 50). Nonetheless, the advance reporting is most likely to come in around the consensus, subject to downward revisions in the next two monthly updates, along with significant downside revisions to all of recent GDP history with the grand benchmark revision due at the end of July.      

__________