Double-Dip Begins to Surface in Market Fears.  A number of recent economic releases have shown slowing or contracting monthly activity, often surprising consensus expectations on the downside. From the standpoint of conventional wisdom in the financial markets and the happy hype from Wall Street and the Administration, the patterns here are suggestive of two unfolding and troubling developments. First, the recent "recovery" was weaker than touted and not much more than short-lived impact from temporary stimulus measures and/or seasonal-factor reporting distortions. Second, the economic downturn is intensifying anew, as was signaled in advance six months ago by annual real (inflation-adjusted) growth in broad liquidity turning negative. Broad liquidity here is defined as money supply M3 and the SGS Ongoing M3 Measure (see Commentary No. 301).  

With hints of renewed economic weakness surfacing in the numbers, and as financial analysts increasingly have mentioned the possibility of a U.S. "double-dip" recession, the Fed began playing language games with its latest FOMC statement (June 23rd), which opened with:

"Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually.  Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls.  Housing starts remain at a depressed level.  Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad [my italics].  Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time."

The italicized text places blame for a negative shift in the economic environment — a shift unforeseen by the Fed — upon the sovereign solvency crisis in Europe. The Administration already is hinting also that European austerity measures could kill the U.S. economic "recovery." Such is nonsense; the problems are not abroad, but at home. 

Decades of unsound U.S. fiscal, monetary, financial-regulatory and trade policies — policies known by the various Administrations, Congresses and Fed Chairmen to have been unsound but that catered to political and/or special-interest needs — have culminated in the current crises. The United States led the global financial system into the current systemic solvency crisis and into the current severe economic downturn.

Only politicians and Federal Reserve officials without viable options and Wall Street hypesters would claim that the current structural economic depression would be turned fundamentally by short-lived stimulus measures. The structural issues never were addressed.  Now, as the structural fundamentals reassert themselves, it is the problems at home that still are at the base of the systemic woes.

As discussed in the Hyperinflation and Consumer Liquidity Special Reports, U.S. households suffer contracting real income. This is a structural issue that has evolved over decades as an offshoot of domestic trade policies. Where consumers accounted for 73.4% of the just-revised first-quarter 2010 GDP (including housing), sustained real economic growth — sustained positive real growth in personal consumption — is impossible without positive real growth in consumer income. Temporary economic growth can be generated with the debt expansion — as Mr. Greenspan encouraged when he was Federal Reserve Chairman — but the recent systemic solvency crisis has triggered a severe debt contraction.

The intensifying economic contraction has serious consequences that do not seem to have surfaced yet in financial-market concerns — consequences that are unexpected — including unexpected additional explosive growth in the federal deficit, an unexpected further surge in Treasury funding needs, and unexpected renewed solvency concerns for the banking system. Such conditions are not happy news for the U.S. equity or credit markets.

The broad outlook is unchanged. The economy still is in a particularly severe and protracted downturn. The consequences of that and the extreme fiscal abuses practiced by the U.S. government over decades promise a shift in global market concerns to the U.S. dollar, with an eventual massive flight from the U.S. currency and a U.S. inflation surge that should lead into hyperinflation. Over the long haul, those with dollar-denominated paper assets would do well to consider preserving their wealth and assets. Irrespective of possibly extreme near-term volatility in the various markets, gold, silver, stronger currencies (such as the Canadian and Australian dollars and Swiss franc) and assets outside the U.S. dollar and even outside the United States should be the best bets for accomplishing that long-term wealth preservation.   

Pending GDP Revisions Likely Will Show a More Severe Downturn. This morning’s (June 25th) second round of revisions to first-quarter 2010 GDP showed weaker growth than previously reported, with a greater boost in inventories more than offset by softer consumer spending and a deeper trade deficit than previously reported.  An upwardly revised surge in corporate profits, however, generated an upside revision to first-quarter GDI growth (see below).

The revisions in this report were unusually large for a third estimate — so late in the reporting cycle — and likely reflected efforts at positioning the first-quarter numbers in the upcoming annual GDP revisions, so as to have minimal revisions to the first-quarter growth patterns next month, when the "advance" estimate of second-quarter GDP is released along with the series revisions on July 30th.

Those revisions will restate GDP history back to first-quarter 2007, a period that encompasses the official timing for the recession being clocked from fourth-quarter 2007. Based on patterns of already-published revisions to other series — such as payroll employment — the revised GDP data likely will show weaker than previously reported growth. The new data should show a more severe downturn, a more shallow "recovery" and perhaps indications that the economic contraction started before fourth-quarter 2007.  

GDP.  Published today by the Bureau of Economic Analysis (BEA), the third estimate (second revision) of first-quarter 2010 Gross Domestic Product (GDP) was estimated at an annualized real growth rate of 2.74% +/- 3% (95% confidence interval), versus the previous estimate of 3.04% and 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 2.42%, down from prior reporting of 2.50% and an initial estimate of 2.55%, versus an annual gain of 0.06% reported for the fourth-quarter. 

A greater than previously reported build-up in inventories accounted for 1.88 percentage points of or 68.6% of the 2.74% total annualized GDP growth rate. Inventories built in excess of demand usually trigger inventory-balancing production cut backs in later quarters. Annualized real growth in first-quarter final sales, which is GDP net of the change in inventories, slowed to 0.86% in revision, down from 1.38% in previous reporting and down from 1.67% in initial reporting.

The GDP implicit price deflator — inflation measure — showed a revised annualized pace of inflation in first-quarter 2010 of 1.12% versus the previous estimate of 1.08% and 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 SGS Alternate-GDP estimate for first-quarter 2010 remains an approximate annual contraction of 1.5% versus the official estimate of a 2.4% 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 for the first-quarter. 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 unfolding (see the Alternate Data tab).

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. While widely followed, the GDP series probably is the worst in quality and most heavily politicized of the major economic series. Reporting over the near-term largely is guesstimated and usually is targeted at consensus forecasts.

 

GNP. The second estimate of first-quarter Gross National Product (GNP) showed annualized real growth of 3.45%, down from initial reporting of 3.87%, and versus 5.05% in the fourth-quarter. Year-to-year growth revised to 2.62% from the initial estimate of 2.72%, and 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 unusual capital flows in the global solvency crisis.

GDI.  The Gross Domestic Income (GDI) underwent a massive upward revision from its initial estimate, reflecting an upwardly revised surge in reported corporate profits. The national income account estimates of corporate profits are so heavily massaged and modeled that they rarely reflect real world activity. The second estimate of GDI for first-quarter 2010 showed annualized real growth of 4.18%, revised from an initial estimate of 2.89%, and versus a fourth-quarter growth rate of 5.21%. Year-to-year change was 2.21% in the first-quarter, revised from initial reporting of 1.89%, versus a 0.84% annual contraction in the fourth-quarter.

Volatile Aircraft Orders Soften May Durable Goods Reporting. As noted in Commentaries No. 298 and No. 299, the entire historical series for durable goods orders was revamped in a massive benchmark revision last month. The net effect on reported growth patterns over the last several years was to accelerate the pace of declining orders activity into the benchmark year of 2008, with an accelerating pace of recovery in modeled and guesstimated data coming up to the present. The legitimacy of the current upside bias will be determined in the next several years of revisions. Accordingly, the current data are presented here with a note of caution.

The Census Bureau reported yesterday (June 24th) that the regularly volatile, seasonally-adjusted new orders for durable goods fell by 1.1% (1.0% net of revisions) in May, after a revised 3.0% (previously 2.9%) gain in April. Unadjusted, year-to-year change in May 2010 new orders was a gain of 15.3%, following a revised 21.5% (previously 21.6%) jump in April. 

The decline in May new orders was more than accounted for by a 29.6% decline in new orders for nondefense aircraft and parts, which otherwise had spiked recent reporting (April orders were up by 215.7% from March). Given the high month-to-month volatility in and long lead-time for airplane orders, developments here are much longer-term in their implications on broad economic activity than are items such as new orders for automobiles (up 0.7% monthly for May).

The widely followed nondefense capital goods declined by 2.8%, seasonally-adjusted, for the month in May, after gaining a revised 8.2% (previously 9.2%) in April. Also heavily influenced by aircraft orders, the unadjusted year-to-year change in the series was up by 18.9% for May, a somewhat less-torrid pace than the revised April annual gain of 42.6% (previously reported at 43.4%). {{end}}

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