King Report: Economic Data Turns South

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For the past two weeks we have been warning that economic data is turning lower. On Wednesday, US beancounters manufactured a better than expected GDP but private economic data appeared that was materially worse than expected.

The ADP Employment change for September is -240k; -200k was expected. More importantly, the
closely-watched Chgo PMI declined to 46.1, which is below the 50 line of demarcation between growth and contraction. 52 was expected. ‘Production’ declined to 47.2 from 52.9; ‘New orders’ declined to 46.3 from 52.5 and ‘order backlogs crashed to 36.7 from 45.8…Why would anyone expect a 2-point increase with other data heading south and the termination of the ‘clash for clunkers’ artificial boost?

Stocks were saved from big losses and commodities rallied on Q3 performance gaming and because Atlanta Fed President Dennis Lockhart surfaced to state that the Fed must eventually remove the juice but, “I don’t think that time has yet come, and to be consistent with my outlook, I think it may well be some time before comprehensive exit need be underway.”
Lockhart’s pronouncement indicates he believes the economy is still struggling and vulnerable.

The dollar sank while gold and commodities rallied on Lockhart’s dovish assertion.

It appears that Fed officials are now ‘good cop, bad copping’ the markets. Just one day before
Lockhart’s dovish braying, Dallas Fed President Richard Fisher stated, “I expect that when it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity to that with which we pursued monetary accommodation.”

And on Wednesday evening, Phily Fed President Charles Plosser, speaking at Lafayette College, said the Fed should tighten credit “promptly” when it appears necessary to avert a recurrence of the high inflation that plagues the US during the late 1970s.

“Our credibility depends on it. We recognize the costs that significantly higher inflation and the
ensuing loss of credibility will impose on the economy if we fail to act promptly, and perhaps
aggressively, when the time comes to do so.”

Also contributing to Wednesday’s dollar decline and commodity rally was: 1) reports that the BoJ might allow its emergency corporate debt monetization program to expire; and 2) the Bank of England said it had no immediate intention of lowering rates on bank reserves. So the pound and yen rallied.

As we warned, US Winston Smiths concocted a better GDP despite a preponderance of private industry data to the contrary. GDP was 0.5 better than consensus even though GDI was revised 0.5 lower!?!?!

John Williams: 2nd-Q GDP Decline Narrowed in Revision (to -0.8% from -1.0%), but GNP and GDI
Contractions Deepened (GNP to -1.0% from -0.8%, GDI to -2.6% from -2.1%) – Annual GDP Contraction Remained Worst of Post-World War II Era