Economy on Brink of Renewed Decline — Don’t Blame It on Europe. The broad money supply continues to tumble on a year-to-year basis, with May data likely to show deepening annual contraction both before (nominal) and after (real) inflation adjustment. The lead-time between the signal for economic downturn (annual decline in real M3) and the actual softening of economic data suggests that the downturn is close, and it could surface in the first major economic release for May: next Friday’s (June 4th) employment/unemployment report (see Commentary No. 296 for detail on the signal). There is potential for May payrolls to contract net of the temporary census boost.

Some on Wall Street and/or the Administration may be anticipating a double-dip recession, since stories already are surfacing of how the systemic solvency problems in Europe could push the U.S. economy back into recession. While politically it may be worth the effort to divert blame abroad, the problem remains a liquidity squeeze at home, where the Fed and the Administration have been unable to provide long-term stability to the system or adequate liquidity to consumers and businesses. 

Ironically, as discussed in the prior Commentary No. 297, the weakness in the money supply foreshadows the economic renewed downturn, which in turn should set the stage for a serious inflation problem. The systemic crises of the last couple years may be contained, temporarily, but they are not resolved. Renewed economic downturn would threaten whatever systemic stability has been in place.  The worst is still is ahead in the ongoing economic and systemic solvency disasters. Details will be updated in the next several Commentaries. 

Gimmicked Gross Domestic Income? Gross Domestic Income (GDI), with fair consistency, has shown a longer and deeper recession than has Gross Domestic Product (GDP). In the 13 quarters reported beginning with first-quarter 2007, real (inflation-adjusted) GDI has shown nine quarter-to-quarter contractions, while GDP has contracted in just four quarters.  

Where the Bureau of Economic Analysis (BEA) announced today (May 27th) its first revision to annualized real first-quarter 2010 GDP growth, with growth slowing to 3.04% from initial reporting of 3.24%, the first estimate of GDI growth for the quarter was 2.89%. First-quarter GDI growth, however, would have been reported at 1.95%, but for an unusually-late downward revision to fourth-quarter 2009 GDI. The GDI revision actually reflected an increase in the "statistical discrepancy" between the GDI and GDP. One might expect a narrowing, not a widening in the discrepancy, as later and presumably better-quality data become available.

The differences in reported growth are despite GDP and GDI being defined as equivalent measures of broad economic activity. As noted in the sidebar, GDP measures the consumption-side of the economy, while GDI is the income-side. If the two series do not equal each other after the data are gathered, GDI is reconciled to GDP with an adjustment for "statistical discrepancy." At present, that discrepancy is $276.6 billion, meaning that the surveyed level of the GDI — net of the statistical discrepancy — is 1.9% below that of the GDP. Where the standalone GDI does not receive the media and Wall Street focus of the GDP, and its reporting lags GDP reporting by a quarter or two, it is not subject to the same political pressures and financial market needs that impact GDP reporting. Accordingly, I view the GDI series as better-quality indicator than GDP of broad business activity.

GDP.  The BEA’s second estimate (first revision) of first-quarter 2010 Gross Domestic Product (GDP) was an annualized real growth rate of 3.04% +/- 3% (95% confidence interval), versus an initial estimate of 3.24%. Such followed a 5.55% annualized gain reported for fourth-quarter 2009 GDP. The year-to-year change in real first-quarter GDP revised to 2.50% from an initial 2.55%, versus an annual gain of 0.06% reported for the fourth-quarter. The downside revision — though within the realm of statistical noise — reflected weaker personal consumption and a larger trade deficit than previously estimated.

Annualized real growth in first-quarter final sales, which is GDP net of the change in inventories, revised to 1.39% from 1.67% in initial reporting.

The graph shows official year-to-year change. The "recovery" in year-to-year growth still reflects the nature of the protracted recent bottom-bouncing in the economy. The pattern should flatten out and turn negative, once again, in long-range revisions and in future quarters. 

The GDP implicit price deflator — inflation measure — showed a revised annualized pace of inflation in first-quarter 2010 of 1.08%, versus an initial estimate of 0.88%, up from 0.50% in fourth-quarter 2009. In contrast, annualized inflation for the CPI-U in the first-quarter was 1.53% versus 2.62% in the fourth-quarter. The higher the inflation rate used in deflating the GDP, the weaker is the inflation-adjusted number. The 0.20% upward revision to the first-quarter’s implicit price deflator exactly offset the 0.20% down revision in the revised real growth for the quarter.

The SGS Alternate-GDP estimate for first-quarter 2010 is an approximate annual contraction of 1.5% versus the official estimate of a 2.5% gain, less-negative than the annual 4.6% contraction (0.1% official gain) estimated in the fourth-quarter. While annualized real quarterly growth is not formally estimated on an alternative basis, a small quarter-to-quarter contraction likely would have been realistic. The relative upturn in annual change reflects the bottom-bouncing at low levels of activity seen for much of the last year in key underlying economic series, not an economic recovery. As discussed in the opening comments, an intensified downturn appears to be in the offing.

GNP. The initial estimate of first-quarter Gross National Product (GNP) showed annualized real growth of 3.87%, versus 5.05% in the fourth-quarter, with year-to-year growth of 2.72%, versus 0.42% in the fourth-quarter. Where GDP is GNP net of the trade balance in transfer payments (interest and dividend payments), the GNP continues suffering distortions from the effects of the global solvency crisis.

GDI.  As noted in the opening GDP comments, the initial estimate of Gross Domestic Income (GDI) for first-quarter 2010 showed annualized real growth of 2.89% (1.95% net of revisions), versus a revised fourth-quarter growth rate of 5.21% (previously 6.17%). Year-to-year change was 2.72% in the first-quarter, versus a revised 0.84% (previously 0.61%) annual contraction in the fourth-quarter.

Massive Benchmark Revisions Reshape Durable Goods Orders. The Census Bureau reported yesterday (May 26th) that the regularly volatile, seasonally-adjusted new orders for durable goods rose by 2.9% in April, after an unchanged level of activity in March. Unadjusted, year-to-year change in April 2010 new orders was a gain of 21.6%. The entire historical series was revamped in a massive benchmark revision on May 14th, which made current data and previously reported data inconsistent and may have doomed the series to the scrap bin of once-meaningful leading indicators.

Starting late in 2006, the level of new orders was upped at an accelerating pace, up by a peak of 9.9% as of November 2007, with sharply decelerating upside revisions then through March 2009 (level revised upward by 1.6%), followed by a re-acceleration to the upside in revisions through March 2010 (level revised upward by 6.6%). The changes were crafted carefully to show a deeper contraction in economic activity than previously reported, but also with recent stronger upside. I’ll write separately on the implications of the changes — assuming adequate explanation is available — as to the surviving quality of this series as a leading indicator to broad economic activity.

The widely followed, but also seriously revamped, nondefense capital goods reportedly rose by 9.2% in April, after falling by 6.8% in March, with unadjusted year-to-year change up by 43.4%.

 Week Ahead. Given the underlying reality of a weaker economy (or 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.

Payroll Employment, Unemployment Rate (May 2010).  The May jobs and unemployment data are due for release on Friday, June 4th. Per Briefing.com, consensus expectations are for a 500,000 gain in May payrolls (primarily temporary census hires), versus a 290,000 gain initially reported for April, and a 9.8% unemployment rate, down from 9.9% reported last month.

The economy should be starting to decline anew, into a double-dip downturn or a re-intensified contraction. Accordingly, May payroll employment is at fair risk of showing a month-to-month contraction, net of the temporary census gains, which otherwise will reverse fully in the several months that follow. 

In the similarly-timed 2000 census, part-time and intermittent census hiring totaled 181,000 through April of 2000, with peak monthly hiring of 348,000 in May. The peak aggregate of census hiring was in May, at 530,000 (the BLS numbers do not add up presumably due to rounding), with 225,000 jobs subsequently lost in June 2000, as the layoffs of census hires began.

As of April 2010, cumulative census hires had reached 154,000, with a total of 600,000 or so being suggested as an approximate peak. Again, whatever is picked up in May for the census will disappear quickly in the ensuing months.

The specific impact of the census hiring on unemployment will be difficult to determine, as a number of the part-time census hires already are counted as employed at other part-time work. The headline U.3 unemployment rate could increase, but the broader U.6 measure is a better bet to do so. Nonetheless, U.3 should be topping 10% meaningfully in the months ahead.

An updated jobs report outlook will be published mid-week, next week, as details on related series become available.