Fellow Shortrunners,

    One thing that economists like to do is to construct models.  Econometricians have been  analyzing data to come up with equations that purport to predict the future course of the economy for almost a century now.  A significant portion of intellectual debate has centered on the pragmatism of such work.  Philosophers have questioned whether economics can ever find true relations or even probabilistic ones.  Economists such as Robert Lucas have attacked econometrics as a policy tool on the grounds that it cannot take into account expectations.  Rational individuals behavior will be influenced by policy.  Because of this, any policy based on econometric models would change what the policy was predicting in the first place and thus be subject to error.

   Sure, consumers, producers, the market as a whole is clever, maybe even rational.  So are policy makers though.  The Federal Reserve is charged with maintaining price stability in the United States.  Its officials know that the policy it chooses will affect the economy by impacting both the real economy and expectations.  For example, most conventional economists would agree that when people are confident that prices will rise, they will tend to act in a way that bids up prices.  One of the big worries of late has been over possible deflation, that is, falling prices.  So what better way to ensure price stability than to talk about the Fed's ability to maintain it?

     In fact, this is just what happened this week.  Twice.  First, new Fed Governor Ben Bernanke gave a speech outlining the likelihood of deflation and the measures that the Fed could take to stave it off.  In short, he suggested that deflation was unlikely to occur in the US with its strong financial sector, resilient and flexible markets, and the recent stability in prices.  Finally, he suggested that Federal Reserve would stand as a "bulwark" against deflation.  It could add money to the economy even if interest rates were taken down to zero.  To do so, "the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys."  Here, Bernanke is suggesting that the Fed could even become involved in other sectors of the US economy.  It could for instance buy corporate shares, foreign government debt, or even make low-interest-rate loans. Stressing that prevention was preferable to curing deflation, he notes that fiscal policy can always be used as an economic stimulus.

    Second, Dallas Fed President Robert McTeer, a noted dove, suggested that interest rates, at their current level, were just right.  While suggesting that he did not fear deflation for the US economy, low interest rates would still allow the Fed could kill 2 birds with one stone.  That is, they will tackle the very real problem of stimulating faster economic growth as well as help to combat potential deflation.  Both Fed economists make valid points.  In reality, we just haven't seen enough hard economic data to make a valid case for deflation in the near future.  It seems most of the talk of deflation in the US so far has been mere speculation.

Economic Releases

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

International Trade: -$38 Billion
Release Date: 11/19

• Despite narrowing slightly, the US trade deficit remained near record levels at $38 billion in September.  The sizeable deficit persists largely because the American economy, though suffering, is faring better than its major trading partners, in a global slump.  Similarly, higher oil prices, a major US import, are also hitting the bottom line.

NAHB Housing Index: 65
Release Date: 11/19

• November's NAHB Housing Market Index rose to 65 from October's reading of 63.  The NAHB Housing Market index is centered on 50, with readings above 50 indicating expansion and those below 50 suggesting contraction.  It is a survey based index recording negative and positive readings from home builders around the country.

Consumer Price Index: 0.3%
Release Date: 11/19

• According to the Bureau of Labor Statistics, consumer prices in the US rose 0.3% on a seasonally adjusted basis in October.  Excluding food and energy, consumer prices rose a more moderate 0.2%.  A lack of inflationary pressure will allow the Fed to keep interest rates low to help the economy given the recent weak economic news.

Housing Starts: 1.6 Million
Release Date: 11/20

• Despite the strong NAHB housing index number, housing starts dropped by over 10% in September.  Nonetheless, housing starts activity, even after the slowdown, is still at historically high levels and will continue to serve as a major source of US economic growth.

Index of Leading Indicators: 0.0%
Release Date: 11/21

• At 114.4, the Conference Board suggested that the Index of Leading Indicators was unchanged in October.  Similarly, the coincident index, which measures current activity and the lagging index, which measure where the economy has been, both held steady.  The coincident index, according to Board economists, "continues to suggest a recovering yet fragile economy."

Treasury Budget: -$54 Billion
Release Date: 11/21

• The fiscal budget dipped heavily into the red during October.  The $54 billion figure was 600% as large as the deficit posted during October of last year and reflects an array of new government expenditure.

Jobless Claims: 376,000
Release Date: 11/21

• Last Thursday, jobless claims seemed to break some resistance to fall to 376,000 from an upwardly revised 401,000.  Jobless claims had been hovering around 400,000 for several weeks.  Improvement in the labor market will be a welcome sign for the US economy as it will both bolster output and prop up confidence and demand.

ECRI Weekly Leading Index: 118.2
Release Date: 11/22

• The ECRI's Weekly Leading Index rose to 118.2 from 117.4 last week.  Economists for the Economic Cycles Research Institute suggested that early November may mark a turning point for the economy.  The index's growth rate advanced slightly.

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Issue #128

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