Fellow Shortrunners,

     Despite some signs of compliance from Iraq, the threat of war continues to drive oil prices higher. This in and of itself is bad news for the ailing US economy, but it has recently become even worse as the international value of the dollar has declined. Weak economic data, falling stock markets, and the resulting declining international investment in the US have combined to weaken the dollar relative to a number of international currencies. In spite of the falling purchasing power of the dollar, Americans have not scaled back their imports. As such the current account deficit on goods and services, i.e. the trade deficit, ballooned to its largest ever monthly figure of $40 billion in November. The leap of almost 14% over October's figure took most commentators by surprise.

     First we have to ask ourselves, is the recent build up in the trade deficit necessarily a bad thing? From a purely economics vantage point, given the current US economy, yes, it probably is, for a number of reasons. Most importantly, international trade has a direct impact on GDP, the government's measure of output in the United States. Going into Friday, most economists were predicting a lackluster level of GDP growth during the fourth quarter to begin with. The general consensus seems to be that this increase in the trade deficit will likely cut off yet another hefty piece of GDP growth, as much as 0.5%. Similarly, a rising trade deficit will likely bring back to the surface a new rash of worries over the value of the dollar and of the dangers of the dollar overhang.

     There is a silver lining to this story. There are many reasons to be worried about the trade deficit and the falling dollar, but there are equally plausible arguments to not be. First and foremost, some economists have countered that the dockworkers’ strike was partially to blame for the size of the deficit, as importers brought in a flood of goods in November in anticipation of a possible cutoff in supply. If this is the case then it should correct itself in December. If the rise was caused by rising oil prices and a falling dollar, the problem could take much longer to correct. Weakening in the dollar may also help to stave off deflation. This is especially pertinent given that both consumer and producer price reports were markedly soft this week. Rising import prices may give domestic producers leeway to raise prices and for many corporations, preserve profitability.

     More subtle information to be gleaned from the release was that the overall volume of both imports and exports rose during November. This is good news for both the US economy and the global economy as a whole, both of which could do with the added demand. Demand for imports tends to be income elastic, that is when incomes fall or even when income growth slows, demand for imports will fall more sharply than demand for domestic goods. A lack of contraction in international trade is a good sign on these grounds. There is something to be said for the resiliency of the US economy in that despite potential war with Iraq, a weak labor market, and bearish stock markets, it can still support a strong level of international trade.

Economic Releases

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

Retail Sales: 1.4%
Release Date: 1/14

• Retail sales rose 1.4% in December, bringing the year over year change for 2002 to 3.4%, a low rise in retail sales compared to the past decade.  Lackluster retail sales growth is likely the result of collapsing consumer confidence driven by a weak labor market picture and a declining stock market.  Given the rise in consumer indebtedness in the boom of 2001, it may not be such a bad thing for households to step back and curtail their spending, but for the economy as a whole it may spell future weakness.

Business Inventories: 0.2%
Release Date: 1/15

• Wholesales reported to the Commerce Department that their inventories rose on average 0.2% during November.  November's increase was partly seasonal, gearing up for the holiday season, and partly the result of slowing auto sales.

Producer Price Index: 0.0%
Release Date: 1/16

• The BLS producer price index was unchanged during December.  The more heavily watched core index dropped a significant 0.3%.  Analysts going into the morning had expected both the overall and the core producer price indexes t rise.  The unexpectedly low price levels continue to spur on the threat of deflation to the US economy.

Consumer Price Index: 0.1%
Release Date: 1/16

• December's consumer price index came in at a meager 0.1%.  The core index rose a more healthy and normal 0.2%.  Overall consumer price pressure in the economy appears non-existent, except for the recent trends in which imports, particularly oil, have begun to rise in price (the result of a falling dollar).

Jobless Claims: 360,000
Release Date: 1/16

• Continuing its recent track record of volatility, jobless claims fell by over 30,000 to some 360,000 this week.  For any improvement in the overall labor market picture to be gleaned from this series, we would need to see some sustained decreases in the index.  Most analysts would look for the index to stay well below 400,000 for several months before expecting some positive employment news.

Industrial Production: -0.2%
Release Date: 1/17

• In rather depressing news for the US manufacturing sector, the Federal Reserve reported Thursday that overall industrial production in the US fell some 0.2% in December.  Capacity utilization, a measure of the employment of available productive power at factories, mines, and utilities declined as well, falling to 75.4%.  Some of this decrease came in a scaling back of auto production in anticipation of a cooling market.

Trade Balance: -$40.1 Billion
Release Date: 1/17

• For the first time ever, the monthly US trade deficit eclipsed $40 billion, rising some 13.9% in December. The increase was fueled by rising imports and a falling value of the dollar. At the same time, exports rose only slightly. Most economists are expecting the dollar to fall even farther, and given the weakness of the global economy, such weakening will likely widen the trade gap even further.

ECRI Weekly Leading Index: 119.6
Release Date: 1/17

• The ECRI WLI rose to 119.6 from 119.0 the week before.  The improvement led economists for the ECRI to suggest that economic recovery in the US is still underway barring any significant shocks to the economy.

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Issue #136

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