General Outlook Unchanged. The U.S. economy remains in an economic depression, which is about to intensify anew (see Commentary No. 290). Today’s (April 23rd) durable goods orders and home sales releases are discussed below in that context. 

The cost of preventing a full banking system collapse in last couple of years — although the banking system still is far from stable — is higher inflation; it just has not surfaced yet. Yesterday’s PPI release, however,  showed some early signs of spreading inflationary impact from higher oil prices and a weakened U.S. dollar, but such is not feeding into a hyperinflation, yet. The PPI and precious metals prices are reviewed in that context.

U.S. hyperinflation is inevitable and likely will move to center stage with a massive dumping of U.S. dollars and dollar-denominated paper assets — a potential $7 trillion liquidation — and/or with a failed Treasury auction against a backdrop of soaring funding needs. In either case, the Fed would face the unhappy prospect of having to be the lender of last resort and massive monetizer of Treasury debt (see the Hyperinflation Special Report [Update 2010]). I look for hyperinflation in the next five years, with particularly high risks of the just mentioned currency/funding crises breaking within the year ahead. Elements of this will be reviewed in the weeks ahead.   

March PPI Inflation Bounce Showed Hints of Broader Inflation. Seasonally-adjusted inflation at the wholesale and production level rose in March, reflecting higher food costs (energy costs were muted by seasonals) at the finished goods level, as well as higher costs for steel mill and paper products at the intermediate level, and higher costs for scrap iron and steel at the crude level.  As reported by the Bureau of Labor Statistics (BLS), yesterday (April 22nd), the regularly-volatile, seasonally-adjusted finished-goods producer price index (PPI) rose month-to-month by 0.7%, again, with the impact of higher oil prices masked by the seasonal adjustments. Before seasonal adjustments, the March PPI rose by 1.1%. Such followed February’s 0.6% (0.6% unadjusted) monthly decline. Year-to-year, March’s annual PPI inflation rose to 6.0%, up from the 4.4% annual inflation reported for February. The March 2010 annual inflation rate was the highest since the 8.8% annual rate in September 2008, when the systemic solvency/financial crisis reached panicked levels. 

Reflecting the broadening base of rising commodity prices — 13 of 15 major commodity price indices were higher month-to-month (data are reported not seasonally adjusted) — the PPI All Commodities Price Index was up year-to-year in March 2010 by 9.0%, versus a 6.9% annual gain in February, and also was at its highest growth rate since September 2008. In like manner the March purchasing managers surveys had shown their highest prices-paid index readings since August 2008 for manufacturing and since September 2008 for non-manufacturing industries.

As shown in the following graph, aside from the oil-price-spike period in 2008, the year-to-year PPI finished goods inflation now has reached a level where it likely will break shortly to the highest inflation level seen since the inflation-troubled 1970s and early 1980s.

 

On a monthly basis, seasonally-adjusted March intermediate goods rose by 0.6% (up 0.1% in February), with crude goods rising by 3.2% (down by 3.5% in February). Year-to-year inflation continued to rise, with March intermediate goods up by 7.7% (up by 5.6% in February) and March crude goods up by 33.4% (up by 28.6% in February).

Higher Inflation Prospects Remain Bullish for Gold. The PPI, though highly volatile on a monthly basis, is a leading indicator to broad consumer inflation. The prices of precious metals, particularly gold and silver, also tend to lead broad consumer inflation, reflecting inflationary expectations in addition to acting as safe-havens against political and financial market uncertainties. Over the near-term, both gold and silver prices also remain highly volatile, as shown in the updated accompanying graphs.

 

As discussed in the opening comment, my outlook for a U.S. hyperinflation within the next five years, with particularly high risk of the crisis beginning to break in the year ahead, remains unchanged. In such an environment, holding some gold and silver as a stores of wealth over the long haul makes sense, irrespective of near-term gold-price volatility. Gold will tend to preserve the purchasing power of the dollars invested in it, again as discussed in the Hyperinflation Special Report [Update 2010].

As reflected in the graph of Gold versus Swiss franc, recent relative dollar strength has not been heavily mirrored in gold price movement. Where concerns of European sovereign solvencies have rattled the currency markets, the ultimate sovereign solvency crisis with the United States keeps smoldering in the background. At some point, not too far down the road, a U.S. dollar crisis looms.  When the dollar starts to tank, watch out for inflation impact. Dollar weakness translates directly into higher oil prices in the United States.

Oil is the most significant commodity in terms of impacting U.S. inflation. Oil prices drive not only energy and transportation costs, but also raw material costs for a variety of chemicals, including those used in fertilizers, pharmaceuticals and plastics. Accordingly, it is not unusual to see a high correlation between movements in the price of oil and in gold and silver prices.

Durable Goods Orders Suggest Ongoing Bottom-Bouncing in the Economy. The Census Bureau reported today that the regularly volatile, seasonally-adjusted new orders for durable goods fell by 1.3% (down by 0.8% net of revisions) for the month of March, following an upwardly revised monthly gain of 1.1% (previously a 0.5% gain) in February. Unadjusted, year-to-year change in March 2010 new orders was a gain of 11.9% following a revised 12.8% (previously 12.5%) gain in February. The entire series will be revamped in a massive benchmark revision on May 14th.

The widely followed nondefense capital goods orders fell by 7.5% for the month, following a revised 6.1% gain (previously a 5.2%) gain in February. Year-to-year orders were up by 12.4% in March, following a revised 25.6% (previously a 25.1%) annual gain in February.

The high level of aircraft sales remained — though somewhat softer in the month — continuing to support the aggregate new orders level. Aircraft sales usually are erratic and get stretched out in years, in terms of delivery. Automobile orders, which have a more immediate impact on the economy, rose by 2.5% for the month after dropping by 1.0% in February.

 

Allowing for the recent strength in the heavily volatile, long-term aircraft orders, the general pattern of the broad series — before adjustment for inflation — remains one of bottom-bouncing. Against an average monthly level of $167.2 billion since last December, the March 2010 level of $176.7 billion remained within the realm of normal month-to-month volatility and ongoing bottom-bouncing, again, if considered in the context of the long-term aircraft sales. Nonetheless, as a longer-term positive (measured in years), the aircraft orders continue to push the six-month moving average higher, and it is now above the level of March 2009. 

Still Heavily Warped by Foreclosures, Homes Sales Get Brief Support from Expiring Tax Incentives. March housing starts continued to bottom-bounce at historically-low levels (see Commentary No. 292), but March home sales did show some uptick. As noted last month, though, other than activity related to construction, and builders’ profits from new home sales, home sales sale do not impact GDP reporting directly, although they can signal increased pending economic activity related to demand for appliances, furniture, etc.

Both new home sales (Census Bureau) and existing home sales (National Association of Realtors — NAR) showed some uptick in activity in March, relative to February. Such appears to have been due primarily to the nearing April 30th expiration of tax breaks for home buyers. A similar, but larger spike was evident with November 2009 expiration of the initial tax incentives. To the extent this stimulus pulls sales in from the future, monthly sales should fall off in the months ahead.

New home sales, reported today, gained 26.9% for the month. Although that was barely significant with a 95% reporting confidence interval of +/- 24.6%, it was nonetheless the first time in many months that the monthly change actually exceeded the confidence interval. Yesterday’s existing homes were reported up by 6.8% for the month, yet the two series still suffer serious distortions, both in terms of unit sales and price levels, by the extreme nature of the current economic depression in housing. 

In particular, consider the impact of foreclosure activity. At a magnitude never before seen in the history of these series, the NAR is publishing monthly estimates of foreclosures as a portion of existing home sales reporting (35% for March). Census acknowledges that a portion of new home sales is from foreclosure activity but offers no estimates. Purportedly, foreclosure activity is on the rise, and some in the construction trade have difficulty competing with the pricing of foreclosed properties.

The following updated graphs reflect different measures of home sales activity since February 2009. The numbers, through March 2010, reflect the seasonally-adjusted level of monthly sales, rather than the annual rate usually published.

 

 

The first graph shows the portion of existing home sales estimated by the NAR to have been distressed (basically in some form of foreclosure activity). The February 2009 number was estimated at between 40% and 50%, the March 2009 number was estimated at slightly over half, but all the later estimates were given as specific percentages. The recent uptrend in the percent of sales in foreclosure is not a happy sign, although part of the increase could be due to a seasonality in foreclosures that varies from the seasonally weaker sales at this time of year, depending on how the seasonal adjustments are worked through.  The foreclosure proportion should spike in the months ahead, as aggregate volume slows down.

The second graph shows the level of regular existing home sales versus the foreclosure numbers. The trend of a relatively-softening level of regular sales versus firm foreclosures again is not a particularly strong picture.

Home sales activity rose to a near-term peak as the November 2009 expiration of the first-time home buyer tax credit neared. Given the way the series are defined, new some sales are recorded earlier in the sales cycle (contract) than the existing home sales (closing), so the peak seen in existing home sales would tend to lag that of new home sales, as seen the last two graphs. The related aggregate April 2010 peak is likely to be lower than that seen in November. Keep in mind that monthly new home sales only account for about 7% of total home sales activity.

Week Ahead. Given the underlying reality of a weaker economy (and likely re-intensifying downturn) and more serious inflation problems than generally are expected by the financial markets, risks to reporting will tend towards higher-than-expected inflation and weaker-than-expected economic reporting in the months ahead. Such is true especially for economic reporting net of prior-period revisions.

Gross Domestic Product — GDP (First-Quarter 2010).  The "advance" or "first" estimate of first-quarter 2010 GDP is due for release on Friday, April 30th. Briefing.com reports a consensus expectation for annualized inflation-adjusted quarterly growth of 3.5%, down from the fourth-quarter’s 5.6% pace.  The Bureau of Economic Analysis has limited data available to it for the "advance" estimate and tends to target its initial guess to be in line with the consensus outlook. 

Even so, I would be surprised to see growth reported as strong as 3.5%, which is somewhat above the historical average. If, however, the consensus annualized quarterly growth rate is met, annual real GDP growth would be reported at roughly 2.6%, up from 0.06% in the fourth-quarter.