Fellow Shortrunners,

      For the third straight week, the stock market continued to regain lost territory.  A wave of positive earnings releases and better economic data are helping to bring money back into the market.  Adding fuel to the fire, a potential resolution to the sniper fiasco this week will help to return much of the eastern coast to its normal vibrancy.  That said, continued stock market recovery this week will depend on a number of factors, among the most important being this week's unemployment figure.  Jobless claims have been trending down, a good sign that the labor market, which generally lags the overall economy, may finally take part in the recovery.

      This would be a crucial change, especially considering that there is some evidence that the interest rate cuts may not be enough to pull the economy back on its feet.  Though the housing market is still going strong, automobile sales have been plunging recently.  Low interest rates induced rapid growth in financed sales, but these numbers are starting to fall back to normal levels.  Second, the interest rates haven't sparked any inflation.  This is dangerous for a number of reasons.  The most obvious is that we risk falling into deflation, not a promising scenario for American businesses.  Inflation, historically, has tended to ease recovery efforts by reducing the real debt burden firms bear.  Because it reduces real costs, it dampens the impact of excessive bouts of investment, hiring, and borrowing, such as we saw in the peak of the boom in 2000 and 2001.

   To make matters worse, fiscal policy doesn't seem to be heading down the right path to ease the economy's burdens.  The federal government, which has run a one of its largest deficits ever, has largely increased defense spending, a channel unlikely to promote long-term sustained growth.  The added federal debt burden risks crowding out investment activity for American businesses as well.  Investment spending, Greenspan has emphasized in a number of recent speeches, is key to implementing new and more productive technology.  Second, the inflow of foreign investment into the US, which before allowed continued strength in the financial markets and the dollar, appears to be drying up.  State governments should be the likely candidates for picking up the slack.  They should run deficits to encourage economic activity and help the economy recover.  Nonetheless, a number of states remain committed to balanced budget amendments.  With falling state revenues, this means that many states have begun to cut down their payrolls, everything from administration to education.  These actions are unlikely to help the situation.

       A similar problem has become bitterly obvious in Europe.  The new European Union, which is suffering from economic slowdown in much the same way as the states, has been seeking methods of sparking recovery.  The EU itself contains a Stability and Growth Pact, which limits government spending.  In fact, the way it's worded, the pact forces governments to cut back on spending during slowdowns, a poor economic policy.  The difference for Europe is that the problem has been much more publicized.  So much so that the head of the commission, Romano Prodi, risked political pressure to bluntly call the pact "stupid."  Mr. Prodi is right, and for Europe it seems that something may finally be done about the problem.  The question is, who's going to tell the state governments that balanced budgets are "stupid" policy.  I will. 

Economic Releases

The data section provides charts and data for the most important economic indicators. 

Index of Leading Indicators: -0.2%
Release Date: 10/15

• The Conference Board's Index of Leading Indicators, released Monday, suggested that the economy is likely to still have a bumpy ride in the near future.  The market will look to next week's unemployment figure as a major indicator of the economy's health, both for consumption and the labor market's impact on personal income.  September's decline in the index of leading indicators is the fourth in a row, and most economists take it as a rule of thumb that three consecutive months of declines signal an upcoming recession.

Jobless Claims: 389,000
Release Date: 10/24

• Thursday's jobless claims release gave a rosier picture of the economy than last week's.  Not only did jobless claims fall below 400,000, but data for the previous week was revised down as well.  Falling jobless claims suggest that next week's overall unemployment figure may be well received by the market.

Advance Durable Goods: -5.9%
Release Date: 10/25

• Advance durable goods orders declined a hefty 5.9% in September.  The release did not dramatically impact the market which recognizes the inherent volatility in the index.  Aircraft and vehicle orders both fell sharply.  Excluding these items, orders for the remaining goods declined about 1%.

New Home Sales:0.4%
Release Date: 10/25

• The Commerce Department reported Friday that new home sales during the month of September rose some 0.4%.  Existing home sales, as reported by the National Association of Realtors, rose 1.9% on a month over month basis.  Low mortgage rates are supporting continued demand in the US market, keeping both sales and prices above historical averages.

Treasury Budget:  -$42 Billion
Release Date: 10/25

• The US government was in the red yet again during September.  Continued defense spending helped propel the government to one of its largest ever deficits, with the cumulative deficit for fiscal year ending 2002 reaching nearly $160 billion.

ECRI Weekly Leading Index: 118.9
Release Date: 10/25

• Buoyed by rising stock market values, the ECRI WLI index rose last week to 118.9.  Economists at the Economic Cycle Research Institute continue to emphasize that the economy is not likely to fall into a second recession.

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Issue #124

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