By John Williams
Revived Crisis Brewing? A confluence of signals has aroused my gut instincts of an intensifying systemic liquidity crisis, and possible pending reaction by the Federal Reserve and/or the U.S. Treasury. Since this only is at the gut level, I am just waving a cautionary flag and publishing this as an Alert.
First, growth in broad money supply has continued to falter. Although it will be another week or two before I have the data to publish a preliminary SGS-Ongoing M3 estimate, weekly reports by the Fed have shown the major M3 components (all seasonally adjusted) of M2, institutional money funds and large time deposits to be in general decline, suggesting that August will show a second consecutive monthly decline – at an accelerating pace – and that year-to-year growth is likely to slow from July’s level of 5.2% to something closer to 4% in August. Beyond being a negative for the economy, in the ongoing systemic solvency crisis, slowing broad money growth often has signaled rising systemic stress, foreshadowing intensification in the crisis that in turn has led to Federal Reserve or Treasury response.
Second, the seasonally-adjusted St. Louis Fed’s adjusted monetary base surged by 5.5% in the two weeks ended August 26th, versus the prior two-week period. The latest level is the highest in nearly three months and is 3.8% shy of the record high set in the two-week period ended May 20th. Year-to-year growth jumped to 102.0% in the latest reporting period, versus 91.8% in the prior one. The monetary base remains the Fed’s primary tool for targeting money supply, but it has proven to be of limited impact in boosting money growth, where banks have been leaving their cash with the Fed instead of lending into the normal stream of commerce. Nonetheless, the Fed appears to be pushing here, with consumer and business credit extremely constrained.
Third, President Obama has nominated Ben Bernanke for a second term as Federal Reserve Chairman. As to the merits or demerits of the nomination, the depository system has survived the crisis, so far, without a full banking system collapse or great deflation. The Fed has held the system together, while debasing the U.S. dollar and fighting to forestall a financial collapse triggered primarily by the malfeasance of Alan Greenspan’s actions (otherwise continued by Mr. Bernanke). Given the not-so-politically-popular Fed chairman and earlier expressions of Administration plans to replace him, however, something else may be at work. If a renewed/intensified systemic solvency crisis were brewing, having the question of the Fed chairmanship succession so resolved would be a plus not only for the financial markets, but also for the incumbent Fed Chairman in his ability to navigate the renewed crisis. It is this last consideration that makes the most sense to me as to what was behind
Bernanke’s nomination.
Cash-for-Clunker Deals to Lower CPI/PCE Deflator. Conversations with individuals at both the Bureau of Labor Statistics and the Bureau of Economic Analysis (the BEA has published a notice), indicate that both the consumer price index (CPI) and the personal consumption (PCE) deflator will reflect new car prices net of the cash-for-clunkers rebates. As a result, lower inflation than would have been seen otherwise is in the works for August. The treatment here seems to be unusual, where automobile dealers are not cutting their profits by offering an added discount. The cars are being sold by dealers at regular prices, it is just that part of the cost of the automobile – up to $4,500 – is being paid for by a third party: U.S. taxpayers. I shall publish an estimate of the impact on CPI reporting prior to the August CPI release.
The one-time impact of the cash-for-clunkers program has started to distort other reporting, too. Any net boost in economic data from this program is not a signal of economic rebound or of any fundamental shift in economic activity. It spiked elements of the August manufacturers purchasing managers survey, for example, but pickups in new orders and production were not matched with increased hiring. For most series, severe year-to-year contractions and historically low levels remain in place, despite any month-to-month gains that either are clouded by lack of statistical significance (statistically not different from zero) or by depression-related special distortions tied to home foreclosures, difficulties for new home buyers in closing their transactions, business distortions from extremely large corporations that have passed through or still are in receivership or conservatorship, etc.
Week Ahead. August Employment/Unemployment. Negative surprises here are a good bet. Due for release on Friday, September 4th, both a decline in payroll employment and an increase in the unemployment rate should be worse than consensus expectations. Bad quality seasonal factors that generated better-than-expected numbers last month should more than reverse. Further, help-wanted advertising both in newspapers and online, new claims for unemployment insurance and the purchasing managers survey (ISM) manufacturing employment all show annual growth or activity levels that are historically negative enough to support much weaker than the expected results for the August numbers.
Briefing.com shows expected payroll loss of 225,000 (versus a loss of 247,000 in July), with expected unemployment of 9.5% versus 9.4% in July.
PLEASE NOTE: The next scheduled Flash Update is for Friday (September 4th), following release of the August employment and unemployment data.