COMMENTARY NUMBER 402
GDP Revision, October Durable Goods and Existing Home Sales

November 23, 2011

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Headline Gross Domestic Income (GDP Equivalent) Growth Collapsed with
Suggestion of 0.8% Contraction for Third-Quarter

Slowing Annual Growth in Durable Goods Orders

Existing Home Sales Bottom-Bounce

Once Again, U.S. Government Signals Lack of Fiscal Concerns

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PLEASE NOTE: The next regular Commentary is scheduled for Friday, December 2nd, covering November employment and unemployment, and October new home sales.

—Happy Thanksgiving!  John Williams

Opening Comments and Executive Summary.  As discussed in the last two Commentaries, the U.S. federal budget deficit is beyond control and containment within the sphere of the politicians controlling the White House and Congress (see Commentary No. 400), and underlying economic reality remains an ongoing protracted and deepening economic catastrophe (see Commentary No. 401).  Both contentions have been re-emphasized in developments of the last several days.

The failure of the Congressional Super Committee to reach an agreement has exacerbated concerns in the domestic and global financial markets as to long-range insolvency of the United States.  As discussed in the Hyperinflation Watch, these political actions effectively rub salt into the wounds of those lending money to the U.S. government, and of those living in a world denominated in U.S. dollars.

On the economic front, GDP/GDI reporting and revisions suggest that a possible contraction took place in the broad U.S. economy during third-quarter 2011.  Continued slowing of annual growth for new orders for durable goods in October also could be signaling renewed economic deterioration, while October existing home sales were consistent with ongoing bottom-bouncing in housing industry activity.

GDP.  The first-revision to the third-quarter gross domestic product (GDP) estimate lowered the reported annualized real (inflation-adjusted) growth to 2.0% from initial reporting of 2.5%, which left the estimated growth rate reflecting little more than statistical noise.  The 95% confidence interval around the 2.0% still allowed for an outright quarterly contraction, as well as growth, but initial reporting on gross domestic income (GDI) suggested that a contraction might be in the eventual official economic accounting.

GDI is the income-side equivalent of GDP (the consumption-side), only it is not as heavily manipulated as the GDP.  Where the two series rarely, if ever, actually are reported as equal, any difference is balanced out by adding an offsetting statistical discrepancy to the GDI tabulation.

In an unusual move, the Bureau of Economic Analysis (BEA) introduced real GDI as a new headline number in the November 22nd GDP press release, indicating that in contrast to respective annualized real growth rates of 1.3% and 2.0% for second- and third-quarter GDP, growth rates were 0.2% and 0.4% for second- and third-quarter GDI.  The second-quarter GDI growth, however, had been revised lower to 0.2% from the 1.3% last reported for the second-quarter.  The difference is that if the GDI were reported on a consistent basis with the GDP and GNP, where the growth estimates for a quarter are not revised after the third-estimate of a given quarter (until the annual benchmarking), the third-quarter 2011 GDI would have been reported with a 0.8% annualized real quarter-to-quarter contraction.

New Orders for Durable Goods, Existing Home Sales.  While October durable goods orders showed a second consecutive monthly contraction, seasonal-factor distortions limit the significance of the near-term direction of the monthly data.  Annual growth in both the full durable goods and in nondefense capital goods series, though, has been slowing in recent months, on an unadjusted basis, and such indeed could be signaling a slowing of orders in the months ahead.

The small gain in October existing home sales was consistent with the ongoing general pattern of bottom-bouncing activity in the housing industry.  The National Association of Realtors continued to indicate ongoing systemic difficulties for sales, in terms of credit availability and adequate appraisal levels, with significant closing-sales volume reflecting cash sales and/or distressed sales.

Hyperinflation Watch—No Political Will to Address Long-Range U.S. Government Insolvency.  The Congressional Super Committee’s failed efforts at cutting the budget deficit, even by so small an amount as to be little more than statistical noise in the grand scale of U.S. sovereign solvency issues, signaled to U.S. dollar holders at home and abroad that there exists no political will among those controlling the government—those controlling the White House and Congress—to resolve the not-so-long-term solvency issues of the U.S. government.  As discussed in Commentary No. 400, the behavior of Congress and the White House during the recent federal debt limit negotiations effectively killed any remaining global confidence in the U.S. dollar, and domestic and global markets have been highly unstable—in extreme turmoil—ever since.  The Super Committees actions have exacerbated those market instabilities.  Eventually, this financial-market turmoil should resolve itself with a much weaker dollar against the stronger major currencies, and as reflected in much higher gold and silver prices.  Over the long-term, the precious metals and the stronger currencies remain the primary hedges against what eventually will be a U.S. dollar collapse.

Reiterating Key Points of the Prior Hyperinflation Watch.  An annual GAAP-based deficit running greater than five-trillion dollars is beyond containment and promises eventual hyperinflation, if there is inadequate political will in Washington to address the issue, as currently is the circumstance.  The minimal deficit reduction efforts by the Congressional Super Committee failed, and global reaction appears to be devolving into circumstances that will bring U.S. solvency issues back into focus for the financial markets.  A new dollar-selling panic and crisis reactions actions by the Fed easily could bring the pending hyperinflation threat rapidly to a head.

The economic collapse that began in 2006 or 2007 is ongoing and is worse than popularly is recognized.  With no relief in sight for the structural income and credit problems facing consumers, there is no near-term prospect for broad economic recovery in the United States.  An ongoing economic downturn has severely negative implications for the projected U.S. federal budget deficit, for projected U.S. Treasury funding needs and for banking-system stress tests and systemic stability.  It also promises a volatile political environment coming into the 2012 election, where pocket-book issues historically have dominated national election results more than any other single issue.

There remain no happy solutions available here to remedy the crises, only tools—devil’s choices—for the Fed and the U.S. government to buy a little extra time.  Domestic systemic instabilities, and possibly instabilities outside the United States, make substantial, expanded “easing” actions of some form likely by the Federal Reserve, sooner rather than later.  From the Fed’s standpoint, keeping the banking system afloat remains its primary concern, not expanding the economy or containing inflation.  The ultimate cost in propping the system, however, remains inflation.

The root source of current global systemic instabilities primarily has been the financially-dominant United States, and it is against the U.S. dollar that the global markets ultimately should turn, massively.  The Fed and the U.S. Treasury likely will do whatever has to be done to prevent ongoing crises in the euro-area from triggering a systemic collapse in the United States.  That precedent was established in 2008.  Accordingly, it is not from a euro-related crisis, but rather from within the U.S. financial system and financial-authority actions that an eventual U.S. systemic failure likely will be triggered, seen initially in a rapidly accelerating pace of domestic inflation—ultimately hyperinflation.

The financial markets remain extremely volatile and unstable.  Underlying the various market upheavals fundamentally is the deepening crisis of confidence in the U.S. dollar and in the long-term doubts of U.S. financial, economic, systemic and political stability.  For those living in a U.S. dollar-denominated world, regardless of any ongoing near-term extreme volatility in the U.S. dollar—in either direction—versus the stronger major currencies and gold, the stronger currencies and precious metals, again, remain the fundamental, long-range hedges against what lies ahead.

Massive, fundamental dollar dumping and dumping of dollar-denominated assets may start at anytime, with little or no further warning.  With a U.S. government unwilling to balance or even to address its uncontainable fiscal condition; with the federal government and Federal Reserve standing ready to prevent a systemic collapse, so long as it is possible to print, spend, loan or guarantee whatever money is needed; with the U.S. dollar at increasing risk of losing its global reserve currency status; much higher inflation lies ahead, in a circumstance that, again, could evolve rapidly into hyperinflation.

The economic and systemic-solvency crises and the broad inflation and economic issues detailed in the Hyperinflation Special Report (2011) and in recent Commentaries, continue to unfold with outlooks that remain unchanged.  A fully updated Hyperinflation Report is planned in December, shortly after the December 15th scheduled publication of the 2011 GAAP-based financial statements for the U.S. government.

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REPORTING DETAIL

EXISTING HOME SALES (October 2011)

Existing Home Sales Remain Severely Impaired.  The November 20th release of October existing-home sales (counted based on actual closings, National Association of Realtors [NAR]) showed a seasonally-adjusted monthly gain of 1.4% (1.2% net of prior period revisions), versus a revised 3.2% (previously 3.0%) decline in September.

On a year-to-year basis, October sales rose by 13.5%, versus a revised 11.1% (previously 11.3%) annual gain in September.  The volatility in annual growth still reflects a waning of the variability a year ago of the end-of-stimulus effects.

Foreclosure activity remained a major distorting factor for home sales, with "distressed" activity accounting for an estimated 28% of existing sales in the NAR’s October reporting, down from the 30% estimated in September.  The NAR also has started to break out estimated distressed sales by foreclosures and short sales.  In October, foreclosures accounted for an estimated 17% of total sales, versus 18% in September, while short sales were estimated at 11% in October, versus 12% in September.