"Double-Dip" Begins to Surface in Response to Impaired Liquidity. Consensus, Wall Street, Administration and Federal Reserve hype of a "V" shaped economic recovery should begin to fade, as data in the next several months tend to confirm a re-intensifying economic contraction. I would describe the shape of this recession/depression as one tracing out the path of an inept skier trying out a ski jump: sharp decline, then some leveling out with a brief up-blip, followed by a renewed plunge with the potential for an unexpectedly disastrous landing. A renewed economic downturn is not anticipated in financial market expectations or in the happy economic assumptions underlying consensus or official estimates of the federal budget deficit, Treasury funding needs and banking system solvency. The implications for inflation here were discussed in Commentary No. 301.

Following last Friday’s soft May payroll survey, May retail sales showed an outright monthly contraction this morning (June 11th), providing still-tentative confirmation of U.S. economic activity having passed an inflection point, entering a period of intensified or renewed downturn. Also discussed in Commentary No. 301, linked above, an annual contraction in broad liquidity — measured by real (inflation-adjusted) M3 (SGS Ongoing M3 Measure) — in turn, has signaled the ongoing economic woes and is strangling consumption and normal business activity.      

Reported Nominal Retail Sales. The May 2010 retail sales report — issued by the Census Bureau — indicated a statistically-significant, seasonally-adjusted monthly decline of 1.20% (down 1.06% net of revisions) +/- 0.6% (95% confidence interval). Such followed a revised 0.59% (previously 0.42%) monthly gain in April. On a year-to-year basis, May 2010 retail sales were reported up by 6.91% from May 2009, slower than the revised 8.98% (was 8.82%) annual gain in April. Annual changes still are distorted by the severe trough seen a year ago.

Real Retail Sales.  Estimates of real (inflation-adjusted) retail sales will be published on Thursday, June 17th, in the Commentary following the release of the May CPI data. Month-to-month real change in retail sales for May likely was in contraction, with real annual growth somewhat shy of 5%.

Core Retail Sales.  The "core retail sales" methodology was revamped recently, where the net relative monthly increases and/or decreases in gasoline station and grocery store sales were subtracted from the full monthly retail sales number, instead of the total of gasoline station and grocery store revenues each month. Assuming that the bulk of non-seasonal variability in food and gasoline sales is in pricing, instead of demand, the revamped reported "core" change more closely reflects the actual retail sales experience. In April a reported month-to-month decline in grocery store sales slightly more than offset a gain in sales at gasoline stations. 

This approach remains a work in progress and eventually will be used in the development of additional SGS alternative economic measures. The "core" retail sales is reported in two versions, where Version I uses the original methodology, and Version II version appears to provide a more balanced picture of the impact food and energy inflation have in the standard retail sales reporting.

Consistent with the Federal Reserve’s predilection for ignoring food and energy prices when "core" inflation is lower than full inflation, "core" retail sales were:

Version I: May retail sales — net of total grocery store and gasoline station revenues — fell by 1.2%, the same as the official aggregate loss of 1.2%.

Version II: May retail sales — net of the monthly change in revenues for grocery stores and gasoline stations — declined by 0.9% versus the official aggregate loss of 1.2%. 

April Trade Deficit Hits 15-Month High — Even Net of Inflation (Oil Price) Impact. For April 2010, the Bureau of Economic Analysis (BEA) and the Census Bureau reported yesterday (June 10th) the nominal (not-adjusted-for-inflation) seasonally-adjusted monthly trade deficit in goods and services rose to $40.3 billion — the largest monthly trade shortfall since December 2008 — up from a benchmark-revised $40.0 (previously $40.4) billion deficit in March, and up sharply from the $28.4 billion monthly deficit in April 2009.

Against March 2010, the April trade balance reflected both lower imports and exports, with a sharper decline in exports. Higher April oil imports reflected both higher physical volume and oil prices. Specifically, for the month of April 2010, the not-seasonally-adjusted average price of imported oil was $77.13 per barrel, versus $74.32 in March 2010 and $46.68 in April 2009. In terms of not-seasonally-adjusted physical oil imports, April 2010 volume averaged 9.804 million barrels per day, versus 9.660 million in March 2010 and 9.699 million in April 2009.

Real (Inflation-Adjusted) Trade Deficit. The April data reflected annual revisions (including restatement of monthly imports and exports for corrected paperwork flows) and redefinitions of some services components as goods components, with revisions stretching back to 1999. The recent-period revisions were not excessive, but the data, as reported for goods, on both a seasonally- and inflation-adjusted basis, suggest a small downward revision is due for first-quarter 2010 GDP. Such, however, likely will not show up until the annual GDP revisions, which usually are released at the end of July (July 30th), along with the advance estimate of second-quarter GDP. To the extent there are any more-serious implications for revisions to earlier GDP reporting, such will be discussed in a later Commentary.

The April trade deficit release was not good news for the upcoming estimate of second-quarter GDP. Adjusted for seasonal factors and inflation (2005 chain-weighted dollars as used in reporting real GDP), the January, February and March 2010 respective merchandise trade deficits were revised to $39.5 (previously $40.9), $43.2 (previously $42.3) and $44.1 billion (previously $43.8), or an annualized pace in first-quarter 2010 of $507.3 billion. On the same basis, the April deficit was at its highest level since January 2009, at $44.3 billion, or at an annualized pace of $531.9. If the April shortfall should hold for May and June, the widening trade deficit would have a net negative impact on reported second-quarter GDP growth.

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