Courtesy of Lee Adler of the Wall Street Examiner
The economic news has been better in recent days, that is if you confine yourself to reading the stories in the mainstream media. Beneath the surface, the data reveals a subtle, not so obvious deterioration. It can not be seen in the seasonally adjusted, manipulated, and massaged headline data, but it can in the annual rate of change in the raw, unadjusted data. I also like to call it “actual” data, as in: This is the reality. The seasonally adjusted numbers are figments of some statistician’s imagination. They often do not tell us a thing about what’s really going on.
Yesterday the trumpets were blaring for the good news on industrial production. Before we wet our pants over the good news, I should point out that industrial production represents around 22% of US GDP, according to data in the CIA World Factbook. Everybody knows that we are a service economy. That factoid just quantifies it for you. While industrial production may be a meter for the broader economy, it is not the whole enchilada. Certainly though, if industrial output is running strong, that bodes well for everything else.
Here’s how Marketwatch put it yesterday:
The output of the nation’s factories, mines and utilities surged 0.9% in July as auto assemblies rebounded and consumers turned on their air conditioners, the Federal Reserve said Tuesday.
I think that most readers seeing the word “surged” would infer, “Wow, that’s a really great report!” The article went on to quote an analyst who suggested that this should put fears of an economic “double dip” to rest. That attitude was repeated in other media reports. So there you have it–the conventional wisdom. Everything is hunky dory. No double dippers to be found on Wall Street.
The truth behind the government report is less clear in that regard. In actuality, industrial production fell 1.1% in July. It always falls in July, so whether it’s good or bad is a question of degree.
The seasonal adjustment attempts to account for that, but in so doing it often obscures the real trend. It is a fictitious number. In essence, it acts like a moving average, hopefully with less lag, but not always. The problem is that when real, and especially sudden, changes occur in the structure of the economy, the seasonally adjusted number either can’t keep up with the change, or it over or understates it. The historical factors used in computing the seasonal adjustment may no longer apply in today’s world of just in time inventory management and in view of other structural changes in the economy over the past few years. In this case, the reporting of a 0.9% gain probably overstates the improvement.
In fact, this year’s actual loss of 1.1% is just slightly better than last year’s decline of 1.3% but it looks downright awful versus 2009′s drop of just 0.7%. And 2009 was a terrible year. Oddly, the numbers are much better than in the expansionary years of 2000-2007, but the world has changed. Rapid overproduction and quick pullbacks, particularly in housing, made the industrial production numbers much more volatile then. Seasonal adjustments based on a high volatility environment will spit out meaningless data in a low volatility environment. That appears to be the case now.
The other not so great news is that the annual growth rate has been cut in half since peaking at 7.8% in June of 2010. It’s now down to 3.9%. That’s not bad, and it has stabilized since May, but growth momentum has been below its 12 month moving average since February of this year.
All in all, it’s not a bad report. Economists who cite it as indicating that the economy hasn’t fallen back into recession have some basis for saying that, but when they go further than that, stating that it isn’t likely that the economy will double dip, that’s a hypothesis without a basis. As long as industrial growth momentum is declining, negative growth could be just around the corner.
It might even be closer than that.
The Treasury publishes the Federal Government’s daily cash balances, tax receipts, and outlays with a 1-2 day lag. That’s as close as it gets to real time in the world of economic data. In reviewing that data, I reported in the Wall Street Examiner Professional Edition Treasury Update that the government was cutting it awfully close this week cash wise, and that the cash it was scheduled to raise at this week’s auctions might not be enough.
I projected that by the end of the week, if revenues fell short of the assumptions used by the Treasury Borrowing Advisory committee in estimating the auction sizes for this week, the government would have to sell a Cash Management Bill for the third time in the past 4 weeks. In its August 3 report to the Treasury Secretary, the TBAC boosted its estimate for the 4 week bill size by $12 billion versus what it has estimated in May. I had taken that into account in my analysis, and concluded that it still might not be enough depending on the pace of revenue collections.
Sure enough, on Monday the Treasury announced a 12 day, $20 billion CMB to tide the government over till the end of the month when the next big round of long term debt auctions will raise a giant wad of cash for Uncle Sam. The fact that the government needed a CMB was no surprise. But I was surprised that it was as large as it was. It suggests that revenues are falling even faster than they were in recent weeks when they dropped back to even with last year, in real terms. The $20 billion shortfall below what the government thought it would need, as estimated in the August 3rd TBAC report, suggests a rapid deterioration in the economy over just the past week. One week does not make a trend, but these numbers have been moving in this direction since May, thus it’s part of a trend.
So in spite of the fact that the industrial production data wasn’t very bearish, and the recent weekly jobless claims data hasn’t been too terrible either, the government’s day to day revenue picture indicates that the “not so bad” economic data is likely to get uglier in the near future. The next key data releases to watch for signs of this showing up will be tomorrow’s and next week’s Unemployment Claims, Personal Income and Spending on August 29, the ISM manufacturing index on September 1, and ISM Services Index on September 6.
In the meantime I will update the Government’s revenue picture in the weekly Treasury update in the Wall Street Examiner Professional Edition. If you aren’t already a subscriber, click here to try WSE’s Professional Edition risk free for 30 days!
