Fellow Shortrunners,

      It was an eventful week.  The Dow continued to rise, reaching its sixth consecutive week without dipping into the red, despite less than desirable economic news.  Here in London, it was a busy week for the labor unions.  Thursday coincided with a national fireman's strike, a partial tube strike, and a teacher's strike.  Refusing to work seems to be a popular trend, but it's certainly not a new one.  In recent years, London has seen an annual tube strike.  The firefighters' strike, which saw the use of Britain's military as substitute firefighters, has already been blamed for a number of deaths, as was its predecessor.  At the same time, Britain happens to have the world's lowest unemployment rate.  The country's tight labor market gives more clout to the country's unions, which were already much more popular than those in the US.

     In the US, the major problem that is developing is not a shortage of workers, but an excess of productive capacity.  This week's capacity utilization rate fell to 73.5%, a clear indication that the economy is capable of producing quite a bit more.  What's lacking is the demand.  Stagnant or falling demand is hitting some sectors harder than others, such as the manufacturing sector which has again begun to decline.  At the same time, the interest rate induced automobile sales bonanza (the result of cheaper financing) is starting to cool off.  Apart from the falling sales, we can see evidence of this in October's rising inventory figures.

     It is clear that the economy is having a rough recovery.  The stock market has only recently showed some signs of promise and overall consumer sentiment is still gloomy.  Falling confidence will manifest itself in individuals curtailing spending plans.  Many states are constrained by balanced budget amendments which are only making this worse.  With falling tax income, in order to balance their budget, many states are cutting back, which is just the opposite of what they should be doing.  On the corporate scene, without a rise in demand, we will see more business decisions to forego investment activity.

     This is because it makes little sense to invest in a new plant or in new equipment, or even to hire new workers, if only 73% of your plant's current capacity is being utilized.  Historical evidence has shown that a normal rate of capacity utilization would be somewhere around 82%.  There are other countries that have suffered from serious overcapacity in recent years, the most glaring example being Japan.  Placing confidence in the ever resilient American consumer to prop up demand, the Fed believes that the US is unlikely to follow in Japan's footsteps.  Most analysts agree.  I would like to as well, but I see little reason that the states shouldn't borrow to make recovery more likely.

Economic Releases

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

Import and Export Prices: 0.1% and 0.0%
Release Date: 11/14

• Import prices rose 0.1% in October, due mainly to rising petroleum prices, the Bureau of Labor Statistics said Thursday.  Continued uncertainty in the Middle East is impacting oil prices.  The export price index was unchanged for the same period.   

Retail Sales: 0.0%
Release Date: 11/14

• During October, retail sales were unchanged, the commerce department reported Thursday.  Automobile sales, where the market appears to be saturated, were the main drag on retail sales, and excluding transport, retail sales rose 0.7% during the same period.

Jobless Claims: 388,000
Release Date: 11/14

• Jobless claims edged down last week to 388,000.  Jobless claims has been hovering just below 400,000 for the past few weeks and appears to be relatively stable.

Producer Price Index: 1.1%
Release Date: 11/15

• According to the BLS, producer prices rose 1.1% in October after rising just 0.1% in September.  Rising producer prices is good news for those who had been fearing a deflationary spiral, but it may signal that the Fed will have to soon start taking back some of its interest rate cuts.  Nonetheless, sustained rises in prices, particularly non-oil prices, would be needed before anyone will begin to seriously worry about inflationary pressure.

Industrial Production: -0.8%
Release Date: 11/15

• Industrial production fell by 0.8% in October, the largest fall since September 2001.  Falling manufacturing activity, coupled with weak utilities output, pushed the index down.  Capacity utilization fell as well, hitting 73.5%.  Capacity utilization is at historically low levels, and as long as it remains depressed, firms will find little motivation to invest.

Business Inventories: 0.5%
Release Date: 11/15

• During September, overall US business inventories grew by 0.5%.  The rapid rise in inventories was largely the result of falling automobile sales and the resulting rise in dealer stocks.  Rising inventories are likely to be a liability for the already weak US manufacturing sector.

ECRI Weekly Leading Index: 117.6
Release Date: 11/8

• The ECRI Weekly Leading Index slipped to 117.6 from 118.3 last week.  Economists for the the ECRI emphasized that ongoing business confidence would be essential for the economy in that another round of layoffs could easily push the economy back into recession.

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Issue #127

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