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No Recession? Bunk!

Does anyone still believe in the economic data being churned out by the federal government? From MarketWatch last Thursday:

Brian Pretti, chief investment strategist for East Bay-based Mechanics Bank, has one word for those who keep saying the nation is not yet in a recession: “Bunk.”

“We are still wringing out the excesses of the financial sector,” Pretti says, “and not only is the period of reconciliation–or deleveraging–not over, but we will be living with it for some time to come. We’re in a recession; there’s no other word for it.”

Then why don’t the numbers tell the story?

“Officially, a recession is defined as two consecutive quarters of negative, inflation-adjusted, gross domestic product (GDP) growth. But if you use the wrong inflation assumptions (called the deflator in the GDP reports), the conclusions are wrong, too.”

To illustrate, Pretti points to recent deflator factors used by the Fed to estimate GDP. “For the first quarter 2008, it was 2.7%, for the fourth quarter 2007, 2.4%, and 1% for third quarter 2007,” he says. “Where did the government come up with those numbers that are quite different than the CPI numbers? Since September 2007, the price of crude oil is up 100%; retail gasoline up 69%; natural gas 95%; and the Commodity Research Bureau index for foodstuffs is up 27%. The true nature of inflation in the US has been anywhere between 4-5%, and that means we’ve already been in a recession for a number of quarters.”

The year-over-year inflation as measured by the Consumer Price Index rests at 4.9% as of the June report, which was released yesterday. It highlights Pretti’s point–and calls into question the prior figures that have been used. “No wonder the financial markets aren’t buying the idea that the economy is ‘holding up,’” Pretti says. “Their negative behavior is telling us headline GDP numbers may not exactly be reflecting reality!”

Source:

“Wishful Thinking Aside, It’s a Recession, Folks”
MarketWatch, July 17, 2008

Crash Prophet Gary Shilling Predicts Nosedive In Consumer Spending

Back on June 13, 2007, I wrote a post entitled “Crash Prophets” and spoke of economist/investment advisor Gary Shilling. Dr. Shilling, who was twice ranked as “Wall Street’s top economist” by polls conducted by Institutional Investor magazine, said last summer that the United States was fast approaching a financial storm. From that post:

He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces… are:

1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.

A year later, and the “crash prophet” is providing his latest financial storm forecast. Yesterday, the president of A. Gary Shilling & Co was the subject of a Newsmax.com piece. According to the Internet news site:

The U.S. is already in a recession that’s unfolding in four stages — and it’s going to get a lot worse, investment advisor Gary Shilling says.

“We’re between the second and third stages right now,” Shilling told a Bloomberg interviewer.

“The first phase was the collapse in housing market, led by subprime slide last year; the second phase was Wall Street, where there was a tremendous amount of over-leverage and investment in assets of questionable if not unknown value and highly illiquid.”

Shilling believes the third phase — a big nosedive in consumer spending — is about to unfold.

Yesterday, Bloomberg reported that prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food. The cost of living soared 1.1% after a 0.6% gain the prior month, the Labor Department said. Fed Chairman Ben Bernanke, testifying before Congress Wednesday as part of his semi-annual report on the U.S. economy, warned that consumer spending is “likely to be restrained over coming quarters,” and businesses are “likely to be cautious with their spending in the second half of the year.”

Dr. Shilling told Newsmax:

Once people work through their tax rebates, they’ve run out of borrowing power. Their home equity has disappeared. They’ve been relying on that and on income growth that isn’t happening. With high energy bills and maxed out credit cards, I think consumers are about to go off the cliff….

I look for the biggest decline in consumer spending since the 1930s.

Next up? Phase four, where recession spreads throughout the world.

Oh joy…

Sources:

“Gary Schilling: U.S. In Recession Now”
Newsmax.com, July 16, 2008

“U.S. Consumer Prices Climb by the Most Since 2005 (Update1)”
Shobhana Chandra
Bloomberg, July 16, 2008

The “Make-Believe” Economy

Yesterday, I came across a post by FOX Business’ Elizabeth MacDonald that provides more ammunition to those who claim that the U.S. government manipulates economic data. In “EMac’s Stock Watch,” MacDonald talked about Kevin Phillips, a political and economic commentator for more than three decades, and a onetime Nixon strategist. She noted:

A generation ago Phillips wrote “The Emerging Republican Majority” which Newsweek magazine described as the “political bible of the Nixon administration,” and previously has dissected the fakery in the government deficit numbers- federal, budget, current account and trade deficits- where he says that essentially the country is living on “borrowed prosperity.”

Recently, Phillips released a new work and claims that we are living in a “make-believe” economy. MacDonald wrote:

Phillips, author of “Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism,” (Viking, April 2008), says that the government has manipulated economic numbers to create a “make-believe economy” over the last four decades. Phillips says that since the ‘60s, Washington bureaucrats from both sides of the political aisle have pulled the levers behind the scenes to overplay the vitality of the US economy…

Specifically, Phillips targets three of the most closely watched and what he says are highly manipulated economic measures: The consumer price index, which tracks inflation; the gross domestic product, which tracks the economy’s overall growth; and the monthly unemployment figure.

Phillips says that, once you vacuum out the nonsense, inflation is really at 5% (instead of 2%), average annual GDP growth is in the 1% range (instead of the 3% to 4% range), and unemployment is really at 8% (instead of 5%).

MacDonald’s post is a good read. Of particular interest are the parts where she talks in detail about how the federal government has “monkeyed around” with the economic data since the Kennedy administration.

You can read her post here.

Source:

“Does the Government Manipulate Economic Data?”
Elizabeth MacDonald
FOX Business, June 9, 2008

Quote For The Week

Last Wednesday, the U.S. Department of Labor reported that the consumer price index, or CPI, rose a moderate 0.2% in April. Excluding “volatile” food and energy prices, the “core” consumer price index increased only 0.1%. Over the past 12 months consumer prices are up 3.9%, with “core” inflation running at 2.3%.

In response to this “official” data, Joel Naroff, president of Naroff Economic Advisors Inc., told MarketWatch on May 14:

If you believe that inflation is under control, I have a bridge that spans the East River that I can sell you for a really good price.

Naroff was referring to the Brooklyn Bridge, and the fact that since its opening in 1883 several “salesmen” have attempted to sell the structure even though it has always been the property of the City of New York.

Why Jefferson Is Rolling In His Grave

Information is the currency of democracy.

-Thomas Jefferson (3rd President of the United States. 1743-1826)

I’m not aware of the context in which Thomas Jefferson said this. However, the governing body which Mr. Jefferson helped establish should take a cue from this statement. Mark Lieberman, senior economist for the FOX Business Network, wrote earlier today:

The government has come up with a novel solution to the steady drumbeat of bad economic news: Reduce funding for the agencies which produce and publish the data.

According to the economist, the Bureau of Labor Statistics has been forced to terminate all hours and earnings data reported for local areas, as well as payroll employment for 65 small metro areas. In addition to wiping out some local data, the Bush Administration’s 2009 budget proposal that was submitted to Congress in February ignores a request for funding to update samples for the housing portion of the consumer price index (CPI). Housing represents about 40% of the CPI, which, among other things, is used to determine the annual cost of living increase for Social Security recipients. Lieberman said that the BLS, which compiles CPI, uses a housing sample based on the 1990 census, and will continue to do so as the result of budget constraints.

So, why should you care? The former manager of economic analysis and research at Washington Mutual wrote:

There could be an ulterior motive to the funding cuts, according to Dean Baker, an economist and co-director of the Center for Economic Policy Research, who suggested the updated CPI sample would show more rapid inflation.

… and that Social Security recipients may be getting stiffed on their cost of living increases.

According to the BLS website:

The quality and quantity of some BLS data will be diminished, as fewer resources are available to collect and review data or to perform data analysis. This will result in lowered response rates, fewer published estimates, and a loss of detail in many data series.

The National Association for Business Economics (NABE) added:

With the economy in or on the brink of recession, everyone from Wall Street to Main Street is focused on reports of current economic indicators. Just when reliable and timely indicators are needed most, resources devoted to their production at our federal statistical agencies have been cut, requiring the termination of data series or a reduction in sample sizes used to produce the data.

As I noted back on February 17, this doesn’t appear to be the first time the government is trying to hide bad economic data. As Lieberman concluded:

Changing the measuring rod, it seems, is easier than fixing what has to be measured.

Source:

“Economic News Too Negative? Just Cut Funding for Data”
Mark Lieberman
FOX Business Network, April 21, 2008

Americans See Real Earnings Fall

This past Wednesday, Associated Press business writer Ellen Simon wrote “Workers see inflation-adjusted earnings fall 1.2% for year” in USA Today. Simon reported that inflation-adjusted earnings for the average American worker have fallen 1.2% over the last year, according to the Bureau of Labor Statistics. Higher food and fuel costs have contributed to this erosion in purchasing power, she said. According to the BLS, real earnings (earnings adjusted for inflation) fell in 8 of the last 13 months and were down 0.5% in January compared to the previous month. Dean Baker, co-director of Washington-based research group the Center for Economic and Policy Research, said:

A lot of people have lost a huge amount in their homes, jobs aren’t being created at a rapid rate and wages are falling behind inflation. Workers, in this environment, can’t keep up their consumption. It’s bad for them as far as their living standards, but this is also a serious source of drag on the economy.

Baker told the AP reporter that a consumer pullback in spending could offset Washington’s economic stimulus plan, “But we’d be in even worse shape without it,” he added.

According to Ms. Simon:

Average weekly earnings were $592.74 in January, or roughly $30,800 a year. While that’s about $1,000 a year more than workers averaged in January 2007, inflation has increased at a rate of 4.3% for the same period, outpacing the 3.2% earnings gain.

At the same time, I am not a fan of the “official” consumer price index (CPI) measure because it was heavily manipulated over time (especially during the Clinton administration), with methodological changes that understate inflation. I prefer using the “traditional” measure of inflation (pre-Clinton), which can be calculated by adding 7% to the “official” CPI number (per John Williams’ Shadow Government Statistics), and leaves us with “real” inflation of around 11.3%. This high rate of inflation could explain why I am encountering comments like the following on a much more frequent basis in my everyday research:

I’m confused, everybody keeps telling me the economy is great and I’m not suffering by paying 50% more for my food, clothing and everything else while my pay stays the same. Who should I believe, all those experts or my empty bank account?

-Reader comment, USA Today, February 22, 2008