Fellow
Shortrunners,
Interest rates on 30-year mortgages hit new lows last week, averaging a meager 6.15%. The interest rate cuts of 2001 are continuing to make a splash, first propelling record numbers of new mortgage applications and now record numbers of mortgage refinances as well. Low long-term interest rates suggest that the market is factoring in low interest rates in the long run. There were a number of signs this week that not everyone agrees.
Crude oil prices broke $30 a barrel this week, their highest price in over a year. The increase in prices came after the President's announcement that he would speak to the UN this week in regards to Saddam Hussein. This effect of fear over disruption in the Middle East's oil supply masks another less pronounced possibility. Conflicts tend to bring with them inflation, the result of greater government demand for society's resources. Rising oil prices might not be a perfect indicator of this, but rising gold prices can give us some indication. A recent increase in gold prices suggests that the market perceives uncertainty, whether it be from the anniversary of 9/11, possible war with Iraq, or some other macroeconomic factor.
There are other signs that the inflation may finally be gaining substance. This week's ISM reports, both for manufacturing and non-manufacturing, contained reports by purchasing managers of higher prices. Rising oil prices, in and of themselves, should add to the general price level because of the economy's wide dependency upon the sludge. A foreword looking index of inflation, the ECRI's FIG rose as well, citing rising borrowing, particularly through mortgages. So the question becomes, why are some indicators of future price levels, namely mortgage rates, suggesting low future inflation and others, such as the ECRI's FIG and gold prices, suggesting possible inflation?
The simple answer is their difference in time horizon. Mortgage rates have a long life span, typically in the range of 15 to 30 years. Gold prices, the ECRI's FIG, and the ISM's reports on business activity are much better predictor of short term price levels. So what's the market telling us? It's telling us to watch out for some short-term price shocks, particularly with the anniversary of 9/11 approaching, harsh words over Iraq being spoken, and interest rates at 40 year lows. Nonetheless, all of the these factors are unlikely to have a long-term impact on the price level, and the prospects for controlling future price levels, given the Fed's track record over the past two decades, is promising.
Daniel Hicks
Economic Releases
The data section
provides charts and data for the most important economic indicators.
Construction Spending:
0.0%
Release Date: 9/4
- Given the economy's low interest and mortgage rates, incentives for new construction ventures appear to be in place. Continued construction in the non-residential sector helped to drive investment in new construction projects to rise some $0.3 billion (a small figure), though still somewhat of a surprise given recent contraction in residential construction spending.
ISM
Manufacturing Index:
50.5%
Release Date: 9/3
- Manufacturing activity, according to the ISM index, appears to be approaching a standstill. An array of mixed results from rising production and falling new orders combined to suggest stagnation in a key component of the US economy.
ISM
Non-Manufacturing Index:
50.9%
Release Date: 9/5
- The ISM's non-manufacturing index fell to 50.9% in August from a reading of 53.9 in July. Though still expanding, growth in the service sector of the economy appears to be proceeding at a markedly slower pace. The only significantly positive sign was that new orders remained positive for the month. Other major components, including employment, point towards a dragging economy.
Jobless Claims:
403,000
Release Date: 9/5
- Jobless claims fell to 403,000 from an upwardly revised 411,000 last week. At their current level, jobless claims are indicative of a weak labor market and suggest higher overall unemployment in the near future.
Productivity Growth:
1.5%
Release Date: 9/6
- Revisions to second quarter output per hour by the BLS for the second quarter raised growth estimates from 1.1% to 1.5%. The higher productivity is good news for the economy which relies upon increasing productivity to drive non-inflationary growth, corporate profits, and personal income. The increase in productivity occurred despite meager output growth of 0.5%.
Unemployment:
5.7%
Release Date: 9/6
- US headline unemployment remained unchanged at 5.7% in August, a release by the Bureau of Labor Statistics said Friday. Gains in employment were largely offset by weakness in the manufacturing and retail sectors of the economy.
ECRI Future Inflation Gauge:
109.0
Release Date: 9/6
- The ECRI's FIG rose to 109.0 amid signs of job growth and increased lending. The FIG attempts to provide an indicator of future price levels. Signs of minor inflation may actually be greeted well by the financial markets which have recently feared the possibility of deflation and a Japanese style recession.
ECRI Weekly Leading Index: 120.8
Release Date: 9/6
- Growth in mortgage applications helped the ECRI WLI to rise 0.3 points to 120.8 last week.
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Issue #118
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