Fellow
Shortrunners,
Carefully designed speeches by the President and the Chairman of the Federal Reserve were not enough to halt the spread of corporate bloodshed again this week. Making headlines yet again was telecom giant WorldCom. It is no longer simply a financial scandal; it will be remembered as the largest bankruptcy ever. Spurred by continual dreary corporate news, the Dow shrank closer to 8,000 this week, a level not seen since late 1998.
The stock market's current decline has occurred in spite of a string of rather positive economic data. Recent releases suggest that the economy is recovering from its recession, showing signs of strength even in the manufacturing sector, which slumped throughout most of 2000 and 2001 in an 18 month recession. This weeks jobless claims figure suggests that employment may actually have started to improve as well. So what's plaguing the markets? Rather than poor macroeconomic performance, a lack of investor confidence is likely a root cause. Money is simply leaving the market and running into other assets such as real estate. Americans aren't the only ones who have been spooked by accounting fraud either.
Foreigners do not invest in the US blindly. A flight from the dollar, or more mildly put, weak foreign investment, has brought the dollar's value down. Indeed, the Treasury Secretary's strong words have failed to prop up the currency. This is bad news for the Japanese economy which could really use a weak Yen to bolster imports, but good news for a damaged European Central Bank's pride as the dollar hit parity with the Euro. To complicate matters, the trade deficit climbed to a record $37.6 billion during May. Typically when the dollar falls relative to other international economies, exports should rise and imports should fall as their relative prices change. Nevertheless, during the month of May, growth in imports rapidly outpaced growth in exports. What's to be expected? As long as investors remain bearish on US markets, and Americans desire imported automobiles we can expect to see two things: a burgeoning trade deficit and a an even weaker dollar heading in the future.
Sincerely,
Daniel Hicks
Economic Releases
The data section
provides charts and data for the most important economic indicators.
The data below represents releases over the past two weeks.
Business Inventories: 0.2%
Release Date: 7/15
- A decline in sales during May helped to spur overall business inventory growth of 0.2%. A long run of inventory depletion has rendered business inventories much less of a concern than they were during 2000 and 2001. Retail inventories rose 1% during the same period, driven by sluggish sales of automobiles as the torrid pace of auto sales over the past year appears to have dried up current demand. The overall inventory/sales ratio climbed to 1.36
Industrial Production:
0.8%
Release Date: 7/16
- Industrial Production rose 0.8% in June, a sign that the manufacturing sector is continuing to rebound from its year and a half long recession. Capacity utilization jumped from 75.6% to 76.1%, though the risks are still heavily weighted towards underemployment rather than bottlenecks.
Housing Starts:
-3.6%
Release Date: 7/17
- After a gain of over 10% in May, housing starts fell 3.6%, but still remain extremely elevated in comparison to historical levels. There are several reasons that the housing market is riding its current wave of strength including a flight of investment, including retirement assets, from the dwindling stock market into the housing market.
Index of Leading Indicators:
112.4
Release Date: 7/18
- The Conference Board's Index of Leading Indicators remained unchanged during June. At the same time, the coincident index, which attempts to measure current economic activity, rose 0.3%. The lagging index declined 0.1%.
Jobless Claims:
379,000
Release Date: 7/18
- Amidst signs of economic, though definitely not financial, recovery in the US, jobless claims fell to 379,000 last week. The figure suggests that the overall hiring climate in the US is ameliorating and that the next unemployment figure should reflect this. Continuing claims rose slightly.
Trade
Balance:
-$37.6 Billion
Release Date: 7/19
- The trade balance deteriorated to -$37.6 billion during the month of May as Americans continued to import despite a weakening currency. Some valid objections have been raised that the figure may be overstated due to fear of a California dock workers strike but this won't be evident until we can look upon the situation in hindsight.
ECRI Weekly Leading Index: 122.3
Release Date: 7/19
- The ECRI Weekly Leading Index, a composite forecasting tool which contains financial elements, declined 0.1 last week to 122.3. The indexes readings are still consistent with a mild recovery.
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