Fellow Shortrunners,

     As oil prices continue to escalate amongst fears of conflict in the Middle East, the international value of the dollar continues to decline.  Against the Euro, the dollar has hit its lowest point since 1999, and speculation may take it further.  Given the economy's weak labor market and lackluster recovery, interest rates are likely to remain low.  All of these trends are likely to spark inflation, but have yet to do so because firms are still plagued by excess capacity and an inability to raise prices.  As long as excess capacity remains rampant, firms are likely to stay away from hiring.  This week's unemployment release, which showed firms scaling back current payrolls by some 100,000 in December, fueled fears of and comments on another "jobless recovery."

     The last "jobless recovery" was presided over during Bush senior's presidency.  Bush was heavily criticized for his failure to focus on the domestic economy at a time of weak employment figures, and it looks like our current president is attempting not to make the same mistake. This week the president unveiled a larger than expected stimulus plan with a price tag approaching $670 billion.  Aimed at "jobs and growth," the stimulus plan is largely based around tax breaks.  As some predicted, the President's stimulus plan includes the elimination of the dividends tax.  This is an effort to stimulate the economy, though whether it will stimulate the economy in any "urgent" manner is questionable.  It will if it lifts the stock market.  Such a move might stimulate consumer confidence and thus overall spending and economic growth.  Most economists don't see this as a possibility and argue that any benefit from reducing the dividend tax will likely show up in the long-run, especially since today dividends comprise a small part of most individuals' budgets.  Even more, many dividend payments go straight to retirement plans and would thus have a more marginal impact on individuals' disposable income.

    Additionally, the Bush stimulus plan would accelerate some already planned tax cuts.  The plan was immediately criticized for both its girth and the lack of immediate stimuli.  It has rightfully been called a heavily partisan plan.  The democrats, suggest that for any plan to be a stimulus to the current economy suggest, it should be frontloaded.  They proposed an alternate plan, costing around $136 billion and completely taking place over the course of the next year.  Both plans have their positives, though for different reasons.  One thing among the plans was similar however.  Both recognized a need to send more money to the states.  Of all the two parties' proposals, this appears to be one of the most clear cut.  With states facing budget shortfalls and the constraint of balanced budget amendments, extra funding will help prevent further cutbacks.

Economic Releases

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

ISM Non-Manufacturing Index: 54.7%
Release Date: 1/06

• The Institute for Supply Management non-manufacturing index rose to 54.7% in December.  The release was largely positive with a few minor weak sectors, namely employment and inventories.  Some signs of price pressure were evident as well, but even this was less significant than in November.

Consumer Credit: -$2.2 Billion
Release Date: 1/08

• In November, outstanding consumer credit declined some $2.2 billion with the lion share of the decrease coming from revolving credit, such as credit card debt.  Economists attributed the decline to falling consumer spending coupled with low interest rates.

Wholesale Trade: 0.2%
Release Date: 1/09

• Wholesale inventories increased 0.2% in November.  Rising sales allowed the inventory to sales ration to slip another notch to 1.21.  The inventory to sales ratio is a measure of how long it would take wholesalers to deplete their inventories given current sales and no future production.  While overall wholesale inventory and sales figures are not heavily watched by economists, the inventory to sales ratio is.

Jobless Claims: 392,000
Release Date: 1/09

• Continuing its roller coaster ride of volatility, jobless claims dropped back below the 400,000 mark yet again this week.  The release was overshadowed by expectations of Friday's Bureau of Labor Statistics unemployment release.

Unemployment: 6.0%
Release Date: 1/10

• The BLS reported that the headline unemployment figure remained constant at 6%.  In spite of this, the overall tone of the release was negative, with employers cutting over 100,000 jobs during December.  Most economists had been forecasting some job creation, but the labor market continues to be one of the economy's weaker sectors.  The release immediately stirred fears of the possibility of a jobless recovery.

ECRI Future Inflation Gauge: 116.6
Release Date: 1/10

• The ECRI FIG for December came in at 116.6.  The index has been steadily increasing since January 2002.  At the same time however, it is important to remember that economists are more concerned about the possibility of inflation rather than the actual presence of it, because there simply isn't much price pressure to speak of. 

ECRI Weekly Leading Index: 119.1
Release Date: 1/10

• On Friday, the ECRI said that strength in the economy raised the Weekly Leading Index to 119.1 from 117.6 the previous week.  The increase erased the drop the index experienced the previous week as well.  The index's growth rate increased from -2.8% to -2.4%.

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Issue #135

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