June 4, 2012

By John Williams, Shadow Government Statistics, American Business Analytics & Research, LLC

The major economic reports of the last several weeks generally have shown patterns of slowing, stagnant or negative economic activity, including the initial estimate of first-quarter GDP and the latest reporting on construction spending, payroll employment, the trade deficit, retail sales and the recent release of April housing starts. The report on April industrial production showed a strong month, in the context of unusual volatility in the reporting and revisions of that Federal Reserve series.

The broad outlook for the economy remains unchanged. U.S. business activity began turning down in 2006 and 2007, plunging from late-2007 into 2009, and bottom-bouncing or stagnating at a low level of activity ever since. The purported economic recovery is an illusion that has resulted from the use of artificially-low inflation rates in deflating the GDP, as well as in deflating series such as retail sales and industrial production. Use of understated inflation in deflating a series results in overstated inflation-adjusted growth.

Also, due to structural limitations on individual and household income and credit, chances are nil for any sustainable economic recovery in the near future.

Where formal projections for such items as the federal budget deficit, U.S. Treasury funding needs, and banking-system solvency are based on assumptions of positive economic growth going forward in time, ongoing recession means worse-than-expected federal fiscal results, greater than anticipated U.S. Treasury funding needs, and ongoing and deepening systemic solvency issues.

In response to this—beyond any attempted fiscal stimulus by the politicians controlling the White House and Congress—the Fed likely will come forth with significant new "accommodation" to help the banking system. For political reasons, the need for new stimulus will be attributed to the faltering economy instead of banking system needs. One "benefit" of the stimulus would be the Fed's ability to step in openly in support of what should be increasingly difficult Treasury auctions.

At such time as there is a next Fed accommodation, that likely will be a trigger for heavy global selling of the U.S. Dollar, which in turn should become highly inflationary, very quickly.

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Source: This article was excerpted from "Commentary Number 439: April Industrial Production, Housing Starts" by John Williams, (Shadow Government Statistics, May 16, 2012), www.shadowstats.com, American Business Analytics & Research, LLC.

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