Fellow Shortrunners,

      The US economy grew at a strong pace in the third quarter.  Most economists have suggested that GDP growth will slow in the fourth quarter, the result of lagging consumer spending.  Fears of deflation seem to be waning as the CPI continues to show modest inflation in the US.  The upside potential for inflation is not strong either however as capacity utilization is likely to prevent manufacturers from gaining any pricing power.  One thing is certain though, the real star of the economy, the housing market continues to shine.  There are a number of reasons for this.

    The first, and certainly the most significant is the Fed.  Their interest rate cuts have subsequently lowered mortgage rates and helped to lower the opportunity cost of home purchases.  Lower rates have certainly increased the flow of credit available to potential homebuyers.  Second, the economy has been surprisingly devoid of inflation in spite of the lower interest rates.  This has two effects.  First it reduces pressure on the Fed to cut interest rates.  Second, it tells the market that interest rates in the long-term are likely to remain low.  This lowers mortgage rates by reducing longer term rates across the board.

     At the same time, rising prices are inducing greater demand for home purchases.  Greater demand affects housing prices.  This creates a self reinforcing cycle, which often result in asset price bubbles.  Rising housing starts, demand, and prices are after all, not necessarily a good thing.  They pump up consumer confidence, increase spending and prop up GDP; At the same time however, they can become an imbalance in the same way that rising stock prices can.  Is the current housing market a bubble.  Many economists think so.  That said, many were calling it a bubble 6 months ago and prices and demand continues to rise.  Housing prices are up 5.8% from a year ago, not a remarkably large increase but a much better performance than the stock market which is on track to end 2002 in the red.  I can't say whether housing prices are inflated because I really don't know.  What can be said however is that in comparison to historical levels they are excessive and when the market decides to see this, the transition is likely to be economically painful.

Economic Releases

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

NAHB Housing Index: 65%
Release Date: 12/16

• The Housing Sector continues to propel the economy forward, the National Association of Home Builders Housing Index, suggested Monday.  Its index reached a two year high of 65.  Current sales and expected future sales were two fast growing components of the index.

Industrial Production: 0.1%
Release Date: 12/17

• Industrial production, a measure of crude output at factories and plants rose 0.1% in November.  The release Tuesday by the Federal Reserve found the US to be running at 75.6% a slight increase from the month before.  As long as capacity utilization remains low, competition among manufacturers will block them from passing along any price increases, bad news for the US manufacturing industry.

Housing Starts: 2.5%
Release Date: 12/17

• During November, housing starts climbed 2.4%, yet another sign that the housing sector has yet to reach its peak.  Housing will likely continue to be one of the strongest components of the US economy as long as mortgage rates remain low.

Consumer Price Index: 0.1%
Release Date: 12/17

• Following a 0.3% increase in October, consumer prices nudged ahead 0.1% in November the BLS said Tuesday.  The core CPI, more heavily watched by policy makers, rose 0.2% during the same period.  Continued positive CPI figures will help to allay fears of deflation which have recently captured headlines.

Trade Balance: -$35.1 Billion
Release Date: 12/18

• The US deficit on goods and services dropped from $37.1 billion in September to $35.1 billion in October.  Part of the improvement in the deficit was the result of a brief dockworkers strike in California during early October.  The strike was cut short by the President and has since been resolved by a mediator.  During October, both imports and exports contracted with imports falling faster than exports.

Jobless Claims: 433,000
Release Date: 12/19

• The Bureau of Labor Statistics Thursday Jobless Claims figure fell to 433,000 a decrease of 11,000 from the previous weeks massive rise to 444,000.  At their current level jobless claims are suggesting weakness in the labor market.

Index of Leading Indicators: 0.7%
Release Date: 12/19

• The Conference Board's Index of Leading Indicators rose an unexpectedly strong 0.7% in November, a positive sign for future economic activity in the US.  The coincident index, measuring current economic activity rose a more moderate 0.1% and the lagging index fell 0.2%.

3rd Quarter GDP: 4%
Release Date: 12/20

• Revisions affirmed that previous GDP release suggesting that the US posted a healthy growth rate of 4.0% during the 3rd quarter of 2002.  Nonetheless, commentators were speculative that the 4th quarter was likely to disappoint as holiday retailers who bank on this time of year have already indicated a weak seasonal performance.

ECRI Weekly Leading Index: 118.2
Release Date: 12/20

• The ECRI's Weekly Leading Index rose 0.1 to 118.2.  The Index's growth rate, which gives a clearer picture of what the WLI is suggesting remained in the red at -1.8%.

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Issue #132

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