Fellow Shortrunners,

     On Wednesday, as predicted, the Federal Open Market Committee decided to leave its interest rate target for the US unchanged at 1.25%.  The decision made few waves, but was accompanied by a rather informative statement suggesting that the group's tilt was balanced between price stability and economic growth.  Furthermore, the suggestion was made that an exuberant oil price and political uncertainty were hampering consumer spending but that these effects are transitory.  This may be true.  Oil prices have begun to back off, and despite the continued bellicose comments, war may not be inevitable, or if it is, it may not be protracted.

     Instead, the Fed suggested that no further cut in interest rates was needed this week because productivity growth coupled with an already "accommodative" stance of monetary policy would be sufficient to ensure economic growth.  There is some evidence that the Fed might be on track with this view.  For example, the BLS release of a lackluster fourth quarter GDP growth of 0.7% suggested that business investment activity rose at an annualized rate of 1.7% during the same period.  Similarly, companies facing tighter times may be forced to focus on efficiency and cost cutting, which though painful in the short-term, are beneficial to the economy in the long-term.  Similarly, there are added risks to cutting interest rates any further.

    One such risk is the possibility of a housing market bubble.  Both new and existing home sales releases this week are running at record levels in both quantity and price.  Yale economist Robert Shiller, who became famous after questioning the stock market's rise in a number of fundamental ways in his book Irrational Exuberance, just before the stock market's recent slide, has suggested that our current housing market is also looking very suspicious.  Lower interest rates may drive mortgage rates to fall further and would likely induce further growth in the housing market.

     The fact is that most people think the Fed is right on target with its policy.  Recent criticism of monetary policy has fallen much more heavily on the other side of the Atlantic and not without reason.  Sure, Americans can complain about an ailing economy and weak financial market, but things appear bleaker in Europe.  Over the past month, the S&P has fallen 2% in value.  Britain's FTSE, its major market, has dropped 6 times as much in percentage terms.  Germany's DAX stock market has faired poorly as well, dropping some 6% in value.  The DAX's weakness is a reflection of the weakness of a German economy which expanded at an annual rate of 0.2% last year.  The ECB seems set on maintaining its inflation target, first and foremost, and perhaps the tighter monetary stance is showing in a falling market and slower economic growth.  With the euro gaining ground on the dollar and the American import machine slowing, the ECB might want to think seriously about moving rates to spark domestic demand.

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

Existing Home Sales: 5.2%
Release Date: 1/27

• The pace of existing home sales, as released by the National Association of Realtors (NAR) rose 5.2% from November to December.  The increase moved the total to some 5.86 million units.  This release adds to the already obvious assertion that the housing market remains red hot in a lackluster US economy.  Also released in the existing home sales release was the median price for existing home sales which rose $2,600 from November to December to bring the average home resale to $164,000.  December's release brings to a close what has been one of the strongest years for the housing market  in recent US history.

New Home Sales: 3.5%
Release Date: 1/28

• On Tuesday, the NAR complemented its existing home sales release with the news that new home sales broke record levels in December to rise to over 1 million units.  Continued housing demand is likely to continue to deplete inventories and induce more housing construction projects.

Advance Durable Goods: 0.2%
Release Date: 1/28

• Advance orders for durable goods rose 0.2% in December, failing to meet expectations.  While weak durable goods orders are yet further bad news for the manufacturing sector, there were a few bright spots to this release.  First, orders for computers and computer equipment rose, which could certainly provide a boom to the IT industry.  At the same time, a large part of the decrease came from falling demand for communications equipment and autos.

Consumer Confidence: 79
Release Date: 1/28

• Also on Tuesday, the Conference Board said that its overall consumer confidence figure, a survey based measure of individual's expectations about their livelihood and the future, fell slightly.   Consumer confidence has been sinking since March of 2002 when it peaked at around 110.  Falling consumer confidence may mean weaker consumer spending and may also portend weakness in business investment.  At the same time however, provided that the dollar continues to weaken, firms may find some of their excess capacity being snatched up as exports.

Gross Domestic Produce: 0.7%
Release Date: 1/30

• The Bureau of Labor Statistics confirmed that growth in the US is slowing dramatically.  GDP fell to a meager 0.7% in the fourth quarter of 2002.  This collapse is largely attributable to a slowdown in consumer spending, far and away the largest component of GDP.  At the same time, a worsening of the current account deficit owing to continued relentless demand for imports dragged the figure down as well.  There were some positives that should be noted as well.  First, GDP growth fell, but it is still positive.  A negative figure would have not only indicated greater weakness, but would also have carried with it connotations of weakness and rumors of "recession," both of which hamper consumer confidence.  Also, business investment, which collapsed in 2001, rose 1.5% during the 4th quarter.  Investment activity is crucial for long run growth because it allows for the faster development and implementation of new technology and productive capacity.

Jobless Claims: 397,000
Release Date: 1/30

• Initial jobless claims rose to 397,000 last week, an increase of 14,000.  Despite remaining below the benchmark rule of thumb level of 400,000, at their current level, claims data are indicative of a soft labor market.  Continuing claims, a measure of longer term unemployment dropped slightly during the week.

Personal Income/ Spending: 0.4% / 0.9%
Release Date: 1/31

• During December, personal spending rose 0.9%.  The Commerce Department's release bolstered hopes for a rebound in consumer activity, which has slumped of late and resulted in a rather sluggish holiday shopping season.  Personal income growth was not able to keep pace with spending and notched up a smaller 0.4%.

ECRI Weekly Leading Index: 119.3
Release Date: 1/31

• The ECRI Weekly Leading Index slipped to 119.3 last week on rising jobless claims and weak stock market performance.  The index's long-term growth rate, a better measure of trend, rose from -1.8% to -1.0%.

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Issue #138

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