Fellow Shortrunners,

     Last week I discussed the continued strength of the US housing market.  I suggested that the housing market continues to remain strong not only on the basis of continued low mortgage rates but also because more people are looking to real estate as an investment avenue.  Both of these effects are bolstering demand, spurring new home starts, and raising prices in a self reinforcing cycle. Because houses are so expensive, they have a large impact on household spending and on the economy as a whole.  This importance magnifies the effects of monetary policy.  That is, when the Fed changes interest rates it impacts mortgage rates and thus has a direct effect on the real economy.  This credit channel has implications not only for the US but around the globe.     

     One of the most important questions that has been facing England has been whether or not to join the Euro.  Britain is already a member of the European Union, but has yet to join the common currency.  There are a range of positives that Britain would realize by joining including increased trade, lowered transaction costs and so forth.  But there is a major stumbling block.  Giving up monetary independence, the ability to set their own monetary policy would damage Britain more than it would many other European nations for two main reasons.  The first is that the British economy is much healthier than that of the rest of the EU.  Its housing market is going through much the same experience as the US and policy makers are looking to contain inflation by not allowing rates to fall too far.

     The great majority of home mortgages in Britain are similar to those in the US.  There are a large number of flexible or variable rate mortgages, whose interest rate is affected by the rate set by Britain's central bank.  In most of continental Europe however, loans are made on fixed rate mortgages.  The implication being that changes in monetary policy have a stronger effect on the British economy than they do on continental Europe.  Because of this, the British continue to have a strong disincentive not to join the Euro and the prospects for their entrance in the near future are not very bright.

Economic Releases

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

Personal Income/Spending: 0.3% and 0.5%
Release Date: 12/20

• Personal spending rose 0.5% in November, good news for the US economy as consumer spending makes up the largest portion of GDP and such a hefty increase will likely have a large effect on overall growth.  Personal income rose a strong 0.3% during the same period.  Both releases exceeded analyst expectations.

Advance Durable Goods: -1.4%
Release Date: 12/24

• Advance durable good orders declined 1.4% in November.  Among the largest decliners were aircraft sales, but more broad categories declined as well.  Overall the release was relatively bad news for the economy.  Falling orders will likely hit the manufacturing sector most.  The only component to show much increase was computer and electronic orders, which could partially be a seasonal swing.

New Home Sales: 5.7%
Release Date: 12/27

• For the second straight week we're seeing strong housing figures.  This time, new home sales surged 5.7% during November.  The increase follows a fall of nearly 4% in October and speculation that the housing market may finally have started cooling off.  It seems that mortgage rates are continuing to have a dramatic impact on this sector of the economy.  Other economists have argued that a large portion of the home buying may be speculative as housing prices continue to soar.  If this is the case then the Fed should be wary of a housing market bubble.

Jobless Claims: 378,000
Release Date: 12/26

• After remaining elevated for 2 weeks, jobless claims fell some 60,000 to 378,000 on Thursday.  The decrease moved initial jobless claims below the 400,000 mark, a benchmark used to indicate labor market weakness.  Rather than suggest an improving labor market, recent jobless claims activity is simply showing us a volatile labor market.

ECRI Weekly Leading Index: 119.1
Release Date: 12/27

• The ECRI's Weekly Leading Index rose to 119.1. Its growth rate rose as well though was still not offering a promising picture of the future course of the US economy at -1.7%.  .

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Issue #133

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