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Did you notice the government’s latest figures on gas and food prices? If you didn’t know what was going on, it could have given you a “what the heck” moment.

The Bureau of Labor Statistics (BLS) gave us some crazy numbers to chew on last week. For example, it said that gasoline prices decreased 4.6 percent.

It also said that the price for vegetables dropped 4.1 percent. Beef, veal, and coffee also cost less in April, according to the BLS.

It’s impossible to believe its numbers – that overall energy dropped 0.2 percent and food prices remained the same.

We all know that this can’t be true. The funny thing is, even the BLS admits it. There it is, in black and white, in its monthly Producer Price Index (PPI) report: the index for finished consumer foods climbed 5.2 percent … the energy goods index advanced 17.5 percent … and gasoline prices rose 3.2 percent.

The total increase for the core PPI (excluding food and energy) came to 3.0 percent.

But 3.0 percent was not the number you saw in the headlines last week. The number you saw was 0.4 percent. And the market was still taken aback. It was only expecting 0.2 percent – as in the previous month.

What’s going on here is seasonality. The government builds it into its employment and inflation numbers not to confuse us (though that is arguably the result), but to smooth out the numbers.

Let’s revisit gasoline prices. Why did the BLS say it decreased 4.6 percent when it really rose 3.2 percent?

Because last April and the April before that (the BLS actually goes back five years to compare prices), it rose even faster. In other words, this is the season (as we approach the heavy driving months of summer) when gasoline prices rise rapidly – every year.

Annualizing the 3.2 percent rise in April would give us an almost 40 percent rise for the year, but that’s overestimating what happens. Into the summer, prices usually fall back. There are other months earlier and later in the year when prices fall back. So the annual price increase ends up being much less than 40 percent.

Seasonality can lower “adjusted” price increases. But it can also raise them. For example, what happens if the price of gasoline doesn’t fall beginning in June – as it has done in prior years. If the price of gas just stays the same and doesn’t go up at all, the BLS will be reporting a hefty rise on the “adjusted” price of gas in June.

And if the real price of gas goes up? Then the seasonally-adjusted price could very well cause a panic over energy prices which will make last week’s outcry seem like a whimper.

And what goes for the PPI index also goes for the CPI index. The CPI index beat expectations for the month of April, but only because of adjustments made to the numbers based on seasonality. May’s numbers should also be held down by seasonality. But when June’s numbers are reported (that would occur in July), then all hell could break loose.

Seasonality also was a huge factor in making April’s unemployment numbers look good because a lot of new jobs are usually created in the spring. So the Labor Department added tens of thousands of “new” jobs into its final job count.

One of the sectors where it had new jobs expanding? The financial sector. With all the layoffs by the big banks, do you really think this is a sector seeing strong new job growth?

Without the Labor Department adding these presumed new jobs into its bottom line, instead of reporting “only” 20,000 jobs lost for April, the figure would have been well above 100,000, and you wouldn’t be hearing the pundits remark on how well the job market has been holding up.

The truth is, employment isn’t holding up well. And prices aren’t being held down too well. Mark my words. These employment figures will also be revised upwards. It seems the Labor Department conveniently forgot that we’re on the verge of a recession (actually, I believe we’re already in one).

What seasonality giveth, it will taketh away … come June. These very important inflation and job numbers will not merely slip. They could very well drop drastically. Wall Street won’t like that. If crude prices remain well above $100 by then (as I think they will), it will be damning evidence that the Fed couldn’t, after all, finesse its way out of the twin threats of no growth and rising inflation.

This is my contrarian take. While most economists and brokerages have been predicting a 2nd-half comeback for the economy, I believe it’s going to begin a major leg down. Depression/recession, crisis, runaway inflation, a new bear market, and Fed impotence will be Wall Street’s new battle cries. It won’t be pretty.

Good Trading,

Andrew Gordon

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

Source: It Is the Season of the Bear

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• Talks About Inflation and Interest Rates Will Be on the Front Burner This Week as Economic Speculation Resumes
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About the Author

Andrew is currently the Editor-in-Chief of two monthly investment research services INCOME and The Wealth Advantage. He has also become a leading expert in utilizing Exchange Traded Funds to profit from rising and falling market sectors.

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