Weekly Economic Wrap: Truth in Government

Watching Fed Chairman Ben Bernanke appear before the House Committee on Oversight and Government Reform concerning the acquisition of Merrill Lynch by Bank of America (BAC), it was pretty obvious that the truth was not disclosed. Did Ben lie? He said he did not remember certain things (for background read this hyperlink).

Many Congressmen / Congresswomen were asking “do you beat your wife” type questions. This was some of the best entertainment I have seen since Clinton – Lewinski. Lawmakers love to attack any apparent impropriety to show they are above this kind of behavior.

Whenever I have economic discussions, the issue of the government telling the truth in its economic releases is broached. After Bernanke's performance this week, I am sure this topic will continue to surface.

Not releasing information is lying. Not communicating the real reason why you are doing something is lying.

In the government produced economic data I review, I have found no evidence the government is perverting the truth. The government does a good job of providing detailed backup data – much better than any other government agency on earth. There are some obvious realities:

• There is headline spin. The government is the economic cheerleader. Do you really think they should spin anything other than an optimistic scenario? I have no problem with this spin. It is up to the reviewer of the data to put it into perspective.
• There is a lot of manipulation of data to make it comparable to other reporting periods such as seasonal adjustments or birth / death adjustments. These adjustments are normally so large that even slight miscalculation of these factors will change how you interpret the data. These adjustments are not perfect.
• Our mainstream news outlets do not go past the economic headlines. The little information they report is misleading.

Truth is illusive. We must work hard to expose the truth because actions based on lies or misdirection doom us to failure. The internet is allowing access to data in real time.

The internet does not allow us to hear the conversations of our leaders they have behind closed doors. The few facts which have surfaced relating to government interaction with Bank of America during the acquisition of Merrill Lynch raise a lot of questions.

Truth is normally the first casualty when government decisions go bad.

It is beyond comprehension that meetings are not recorded by any of the participants.

I can only conclude everyone is lying.

Additional Economic Events from this Past Week

The University of Michigan Consumer Sentiment rose for the fourth month in June 2009. Although I too believe things will be better tomorrow, somehow the implementors of this survey find Kool-Aid drinkers who think current conditions are getting better.

Personal income increased in May 2009 due to the American Recovery and Reinvestment Act of 2009. Provisions of the Act reduced personal current taxes and increased government social benefit payments. Excluding these special factors income was essentially unchanged.

The group the runs our economy – the Federal Open Market Committee (FOMC) – met this past week. Their statement had no real change from the last meeting, and basically they are staying the course of actions they are currently undertaking while saying the economy is continuing to be less bad. The Fed rate remains unchanged at 0% to 0.25%.

The Federal Reserve Board of Governors have extended through 01 Feb 2010 the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The expiration date for the Term Asset-Backed Securities Loan Facility (TALF) currently remains set at December 31, 2009. The Term Auction Facility (TAF) does not have a fixed expiration date.

In addition, the temporary reciprocal currency arrangements (swap lines) between the Federal Reserve and other central banks have been extended to February 1. Their statement of the reason for their actions:

The Federal Reserve also announced changes to certain liquidity programs in light of the improvement in financial conditions and the associated reduction in usage of some facilities. Specifically, the Federal Reserve trimmed the size of upcoming TAF auctions, because the amount of credit extended under that facility has been well below the offered amount. In view of very weak demand at TSLF Schedule 1 auctions and TSLF Options Program auctions over recent months, auctions under these programs will be suspended. The frequency of Schedule 2 TSLF auctions will be reduced to one every four weeks and the offered amount will be reduced. The authorization for the Money Market Investor Funding Facility (MMIFF) was not extended, and an additional administrative criterion was established for use of the AMLF. If necessary in view of evolving market conditions, the Federal Reserve will increase the size of TAF auctions and resume TSLF operations that have been suspended.

The Board and the FOMC will continue to monitor closely the condition of financial markets and the need for and effectiveness of the Federal Reserve's special liquidity facilities and arrangements. Should the recent improvements in market conditions continue, the Board and the FOMC currently anticipate that a number of these facilities may not need to be extended beyond February 1. However, if financial stresses do not moderate as expected, the Board and the FOMC are prepared to extend the terms of some or all of the facilities as needed to promote financial stability and economic growth.

The coincident indicators for New York – New Jersey May 2009 is still trending down.

Somebody sooner or later will have to explain how new orders can be up, while inventories, shipments, and unfilled orders are down. In any event durable goods advance data for May 2009 appears overall to be slightly (perhaps even imperceptibly) negative MoM. Everyone is waiting for something to pop up and scream recovery. It is not in this data.

Existing home sales for May 2009 showed a slight improvement in volume and value. Talking to real estate professionals, they have indicated that there has been an improvement in the higher price homes volumes (albeit at reduced prices) which would account for the price increase. Volumes hopefully have bottomed but remain down YoY.

New Home Sales declined by -0.6 percent in May 2009 following a downward revision to April and March data, which still leaves May’s level of sales well above the record low annual rate of 0.329 million units hit in January. There is now a downward trend in unsold new home inventory which peaked at 12.4 months supply in Jan 2009, and now is a 10.2 months supply.

New mortgage applications rose this week. Although the four week moving average of mortgage loan application volume decreased 9.3%, if you remove the refinance portion the new applications rose 2.2%. The refinance share of mortgage activity remained at 54% of applications. The average interest rate for 30-year fixed-rate mortgages decreased slightly this week to 5.44%.

Final GDP numbers for 1Q2009 have been revised slightly upward to -5.5% (annualized decline QoQ). The 4Q2008 GDP decreased 6.3%. Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $48.1 billion in the first quarter, in contrast to a decrease of $250.3 billion in the fourth quarter.

Basically GDP fell over 4Q2008 due to significant declines in private investment. Corporate profit increase over 4Q2008 was due entirely to banks. It is wonderful that banks are profitable and our economy is based on smoke and mirrors.

The 4 week moving average of initial unemployment claims increased slightly to 617,250. Unemployment claims seem to be holding in a tight range. For me, this holding of high unemployment rates pushes us towards a more pessimistic economic scenario. Hopefully as summer progresses, initial unemployment will start trending down.

Filing for bankruptcy this week: Red Roof Inn, Sea Launch (40% owned by Boeing), ProBulk, Sonoran Energy (SNRN), TXP Corporation (TXPO.PK), FIRSTPLUS Financial Group (FPFX.PK). Bank failures this week:

MetroPacific Bank - Irvine, CA, Horizon Bank - Pine City, MN, Neighborhood Community Bank - Newnan, GA, Community Bank of West Georgia - Villa Rica, GA

Economic Forecasts Published this Past Week

The WLI from ECRI is continuing to show improvement in economic conditions six months from now. In their statement last Friday, they said:

Following a 28-week upturn, WLI growth has broken into positive territory for the first time in over 22 months -- an affirmation that an end to the recession is at hand.

The Bank of Tokyo-Mitsubishi UFJ indicated that the Leading Indicator of Inflation increased +0.8 percent in May on top of an unrevised increase of +0.1 percent in the prior month. The year-over-year growth rate for the measure moved up to a drop of -8.3 percent in May, and has fallen for nineteen consecutive months. Seventy-five percent of the components contributed price pressures in May, most notably the ISM price index and slower vendor deliveries.

Disclosures: long MMFs, PYEMX, EWZ, TBT, PGJ, EWY, DBC, EWA, EWC, EWT, PIN, Physical Gold

Comments

[Roger Knights:]

"Truth is illusive."

In a similar vein, Paul Krasner said, "The truth is silly putty."

Jun 28 07:38 AM

[WS1835:]

This isn't hard to figure out.......simple conflict of interest.

Government calculates the numbers and the wish list of the DC elite gets hurt when the numbers are bad. Hence, the numbers are always positively biased. This is why we have rating companies for the private market. Would you buy a bond from General Motors based on General Motors own forecasts? Probably not.

And yet we swallow government figures hook, lines and sinker......

Jun 28 11:47 AM

[jratl:]

I am surprised that the Univ of Mich chart shows1 year inflation expectations have risen to 3.1% while 5 - 10 year expectations have remained relatively flat. I'd expect the recession, reduction in debt, and increased savings would dampen short term inflation expectations while 5-10 year inflation expectations would increase. It looks like consumer sentiment favors the fed's unannounced exit strategy.

Jun 28 02:16 PM

[John Lounsbury:]

Steve - - -

I want to add to the excellent discussion of your article. There are four specifics in the article I want to comment on. For each, I quote from the article and then follow that with my thoughts.

Comment 1 -

"Corporate profit increase over 4Q2008 was due entirely to banks. It is wonderful that banks are profitable and our economy is based on smoke and mirrors."

While the banks may continue to take advantage of the relaxed accounting rules to postpone recognizing losses with the benefit of increasing current profits, there are potential clouds on the horizon for the rest of 2009 for banks. If there is a recovery starting in the second half of the year, longer term interest rates and, therefore, mortgage rates should increase. This will diminish mortage applications, especially refinancing, and bank earnings from those sources will be curtailed. Yes, more people may want to buy a home in a recovering economy, but mortgage affordability would put a damper on that desire.

If there is no recovery in the second half of 2009, unemployment will rise much more than it would with a recovery. This would put a damper on new purchase mortgage applications, as well as increase recognition of bad debt due to unemployment instigated foreclosures increasing. Interest rates would be lower and mortgage rates would be more attractive, but there would be less buying interest and larger foreclosure numbers due to excallating unemployment. Refinancing mortgage volumes might be larger than in a recovery, but how many more refinancing opportunities are there beyond what was accomplished over the past six months?

Comment 2 -

"Unemployment claims seem to be holding in a tight range. For me, this holding of high unemployment rates pushes us towards a more pessimistic economic scenario. Hopefully as summer progresses, initial unemployment will start trending down."

I find the persistence of the high level of initial claims to be a concern. There have been comments and articles about this on Seeking Alpha. (My apologies to the authors whom I have not cited specifically.) All previous recessions were ended with claims peaks followed by much steeper declines in the months following. We are approaching the end of the third month after the peak (4-week moving average peak on April 4) and the latest claims are still at 94% of peak (again using 4-week moving average). This has not happened for all the previous recessions since the claims data has been kept (40 years).

Comment 3 -

"The Bank of Tokyo-Mitsubishi UFJ indicated that the Leading Indicator of Inflation increased +0.8 percent in May on top of an unrevised increase of +0.1 percent in the prior month."

The three other significant minima (below 98) shown in your chart have been "V" shaped, although the climb from the 1991 bottom had a noisy and shallow slope. Let's hope the "V" shape is repeated here. However, economic dislocations are more severe now than in 1991, 1998 and 2001. I guess we'll have to wait and see.

Comment 4 -

"Final GDP numbers for 1Q2009 have been revised slightly upward to -5.5% (annualized decline QoQ). "

The CRI blue line (coincident indicator) finally looks flat. The 2Q slope was much less than earlier quarters, so my inference is that the 2Q GDP will probably come in at a much more positive number that 1Q, but probably still negative. If I had to guess, I would say possibly -1% to -2%.

The next thing to watch for the ECRI blue line is how much it can start rising from the flat position it has finally reached. Since the largest contributor to the indicator in 2Q was probably stock prices, I am fearful that, even with some modest economic improvement, the coincident indicator may not be able to make much progress unless stocks can finish the summer at current levels or higher.

Excellent article, with much food for thought.

Jun 28 03:20 PM

[kruser53:]

Steven Hansen, excellent article (and good comments by JohnL, as well). You do a great job every week with your economic review.

Jun 28 05:51 PM