Fellow
Shortrunners,
In spite of a stunningly poor week for the financial markets and for investor confidence, the Federal Reserve on Friday announced that it would leave its short-term interest rate target fixed at 1.75%. The move reinforces the Fed's stance that policy is based upon real world economic data rather than on fluctuations in the much more volatile financial markets. Indeed, the latest revision to first quarter GDP raised the figure from 5.6% to 6.1%, both of which are indicative of strong economic activity. Nonetheless, there are signs that growth is beginning to suffer. Housing activity, though elevated, has begun to cool off. Consumer spending, the primary engine of demand for the US economy, has begun to cut back as well.
When deciding to leave rates unchanged on Friday, the Fed took this into account. It also found itself with an economy with low interest rates that still lacks serious signs of inflation. Though I tend to feel the short-term risks of sparking inflation are overstated, it appears that a desire to control inflation before it takes root still holds sway. The FOMC in its bias figuratively argued that the risks of inflation weighed against those of weak economic growth were balanced. This policy allows the Fed to justify leaving interest rates unchanged.
Refusing to cut despite outside pressure supplies the Fed greater space in which to maneuver interest rates should economic growth begin to follow the path of the financial markets. There certainly will be spillovers from the stock market to the real economy. Corporate fiascos, such as this week's WorldCom scandal, continue to shroud any real profit estimates in uncertainty. The resulting fall in share prices hits home, as we see in this week's falling consumer confidence and spending figures. Then again, if we really start comparing the economy to today's corporations, we might just find ourselves questioning all of the accounting work.
Sincerely,
Daniel Hicks
Economic Releases
The data section
provides charts and data for the most important economic indicators.
Consumer
Confidence: 106.4
Release Date: 6/25
- Reversing the trend of recovery since September 11th, consumer confidence during June dropped from from 110.3 to 106.4. There could be a number of factors working to drag down confidence including feelings of lost wealth due to falling asset prices. Falling consumer confidence figures are mirrored in the weaker consumer expenditure figures available this week as well.
Existing
Home Sales: -0.3%
Release Date: 6/25
- Existing home sales fell, though less significantly than many economists had predicted. The National Association of Realtors announcement that existing home sales for May declined to 5.75 million units was taken in stride. The current pace of home sales and level of housing prices remain strong and are certainly being bolstered by relatively low mortgage rates.
Durable Goods: 0.6%
Release Date: 6/26
- During May, advance orders for durable goods climbed 0.6%. The index has advanced strongly for the past two months and should help to prevent any inventory build-up should the economy weaken. At the same time, it should help to continue the manufacturing sector's recovery.
New
Home Sales: 1,028,000
Release Date: 6/27
- Picking up some of the slack from the fall in existing home sales was a massive increase in the number of new home sales during May. The size of the increase surprised analysts and suggests that the housing market may still have room to grow.
Jobless
Claims: 388,000
Release Date: 6/27
- Jobless claims fell 5,000 from last week's figure. A decreasing trend in initial claims can be a sign of a general improvement in labor market activity, something that has not been evident despite otherwise robust economic recovery.
Personal Spending/Income: -0.1%/0.3%
Release Date: 6/28
- Consumer spending lagged slightly during May, despite rising incomes. The news will help allow Americans to cut back on their debt burden but will do little to alleviate the economy's woes. Consumer spending comprises the largest part of GDP and weak figures will likely take their toll.
ECRI Weekly Leading Index: 124.0
Release Date: 6/28
- The ECRI WLI advanced despite stock market turmoil. The long-term growth rate remains robust at 6.4%.
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