Fellow Shortrunners,

    On Tuesday, the FOMC will meet for the 8th time this year to set the course for US interest rates.  In debating how to change the Fed Funds Rate, which stands at a historically low 1.25%, Greenspan & Co. will have much on their minds.  This is a particularly difficult task because the economy is currently sending mixed signals.  Among the quandaries facing today's economists is why jobless claims data is suggesting that the labor market is improving but November's unemployment report, which put headline unemployment at a lofty 6%, are conflicting.  Reports from the Institute for Supply Management are suggesting that employment in the manufacturing sector is deteriorating as well.  At the same time that employment is falling, output in the US continues to rise, which is resulting in some strong productivity figures.  As long as productivity continues to expand, the US should be relatively isolated from any long-term inflationary pressure.  This at least should give the FOMC some leeway in trying to figure the economy's situation out.

     In addition to analyzing data, policy makers will have to try to asses the impact of several significant developments on the future course of the US economy.  Among the most important developments this week was the sacking of two of President Bush's key economists.  Treasury Secretary Paul O'Neill and chairman of the National Economic Council Larry Lindsey both resigned this week after having been asked to resign by the White House.  Lindsey, during his tenure, had been instrumental in the architecture of Bush's mammoth tax cut.  News that originally warmed the economy because many saw it as a sign that Bush was willing to shake things up to protect economic growth is now even more uncertain.  It appears that John Snow, chairman of railway company CSX, has been nominated by the President to replace O'Neill.  The move blindsided most economists who had expected a more prominent figure, not to mention one projecting an image somewhat different than that of former secretary O'Neill.

     Not only will uncertainty surrounding these appointments plague the market, continued potential conflict with Iraq will weigh heavily upon the FOMC as well.  They must realize that some price pressure is starting to show in the economy and that the artificially inflated oil prices are one of many culprits.  At the same time however, there is speculation that should the situation with Iraq be resolved without serious conflict that oil prices will drop dramatically (when the "war" premium dissolves).  Perhaps OPEC fears this as well.  They moved this week to curtail cheating (that is, the seeing of more oil by member nations than the cartel allows) by simply expanding production quotas closer to many countries' actual production limits.  I'm not sure that many economists would suggest that such a move would halt cheating.  In fact, it seems that they may even be shooting themselves in the foot, since by providing a course of action that is actually rewarding member countries that are violating the agreement, they may send the message that cheating is ok.  But then again, OPEC is rarely the target of praise, nor should it be.

Economic Releases

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

ISM Manufacturing Index: 49.2
Release Date: 12/02

• Citing contracting new orders and a decline in the employment index, the ISM manufacturing index came in at 49.2% in November. While the overall US economy appears to be recovering, the manufacturing declined albeit slightly for the third straight month.  With orders slowing and order backlogs shrinking, the prospect for the manufacturing sector over the next few months is rather gloomy.

Construction Spending: 0.2%
Release Date: 12/02

• During October, construction spending rose 0.2%.  The gain was largely driven by home building, but there were signs that construction activity was bolstered by governmental programs such as a school buildings and by stronger numbers for corporate building as well.

Productivity: 5.1%
Release Date: 12/04

• Revisions to the third quarter figure for US output per hour suggested that productivity during the period rose at an annual rate of 5.1% as opposed to the previously reported 4.0%.  While the third quarter was strong for both output and productivity, most economists now expect the economy to have a rather lackadaisical 4th quarter with slower growth projected.  Nonetheless, the strength of third quarter productivity is important for the economy as it will help promote long-term economic growth as well as help prevent inflationary pressure.

ISM Non-Manufacturing: 57.4
Release Date: 12/04

• Despite declining employment, the ISM non-manufacturing index surged to 57.4% in November.  A surge in export demand helped to propel new orders and to raise the index.  At the same time, there was some indication that we may be seeing some price pressure.

Jobless Claims: 355,000
Release Date: 12/05

• Continuing a recent trend, jobless claims fell yet again on Thursday, dropping to 355,000.  Recent jobless claims data is clearly signaling that the labor market is going a different direction than that signaled by Friday's employment release.

Unemployment: 6.0%
Release Date: 12/06

• The resignation of two major economic advisors in the US cabinet captured Friday's headlines.  A move that was expected to send the stock market up somewhat had little effect.  One reason was certainly Friday's BLS employment release which suggested that unemployment in the US economy rose to 6% in October.  Perhaps even more ominous is the likelihood of further state cutbacks in an effort to balance state budgets.

Consumer Credit: $8.5 Billion
Release Date: 12/06

• Consumer credit in the US grew at a rate of 1% in October.  Non-revolving credit which has been ballooning recently due to the attractiveness of long-term mortgages contracted slightly.  Revolving debt, such as one would find on credit cards, rose slightly, perhaps seasonally affected by the beginning of the holiday shopping season.

ECRI Future Inflation Gauge: 114.5
Release Date: 12/06

• The US FIG declined to 114.5 in November from a reading of 115.0 in September.  At the same time, a press release for the Economic Cycles Research Institute suggested that should the economy continue to grow, we should start to see an upward trend in price pressure.

ECRI Weekly Leading Index: 120.8
Release Date: 11/27

• On Friday, the ECRI WLI rose to 120.8, a rather positive release suggesting that we can expect to see some improvement in the economy in the short term.

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Issue #130

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