Fellow Shortrunners,

     With a possible breakup of the NATO alliance, the Columbia disaster, and a likely war on the horizon, Americans are inundated by news.  There is so much going on in the international community these days that it is often hard to notice what's going on the domestic front.  This week, the White House unveiled budget projections, including plans for a 4% rise in spending over the next year and outlined in more detail a new stimulus package composed primarily of tax cuts and the acceleration of previous tax breaks.  It seems like just yesterday that I was writing newsletters about the Bush tax plan, and about worries that such a large tax cut would lead to future deficits.  That was 2001, this is 2003 and yet we are faced with the prospect of another large tax cut.  Indeed, the worry in 2001 was that tax cuts would eliminate the budget surplus, which combined with sluggish economic growth, they have done.

     The proposal on tap this week would rival Reagan era tax plans in size and breadth, especially when compounded with Bush's 2001 cut.  Included in the proposal are a number of new tax cuts, a reduction of the dividends tax, and the acceleration of previous cuts.  If the earlier cut was attacked by the democrats for favoring the wealthy this plan is likely to come under even heavier fire for it does so to a greater degree.  Given that the plan has been criticized by republicans as well, despite a republican majority in Congress, there will likely be modifications.

     The most common worry of economists this time around? Same as last time, federal budget deficits.  On docket for the government next year is a 4% rise in overall spending, something that doesn't mesh well with declining tax revenues and weak economic performance.  This fact has escaped official White House budget projections.  Indeed it seems that the White House has used rosier figures for growth, employment, and interest rate than those used by another government entity, the Congressional Budget Office.  Similarly, it seems that these projections are also more favorable than the market is predicting as well.  Furthermore, such projections don't take into account the effect that war will have on the economy, an all too real possibility.  They also assume that the tax cuts will boost employment and spending which is not entirely clear.  A recent article by The Economist addressed just this subject, noting that "on February 10th, 400 economists, including ten Nobel prizewinners, issued a statement arguing that Mr. Bush’s plan will not create jobs and growth in the short run, but will generate chronic budget deficits."¹ For the economic community as a whole, such a large sign of solidarity is rather telling and may hopefully make some waves.

     Fiscal stimuli tend to operate with a lag in just the same way that monetary policy does.  Part of this comes from lag involved in enacting the laws and another part comes from implementing them.  If this plan is being touted as a stimulus package, as it is, it should be front-loaded-- a large amount of the tax savings and increased spending should come in the near future (such as was done with the tax rebate checks).  As it turns out, a great deal of the tax changes won't happen for years.  Many of them center around the ability to create one's own savings plan, such as higher contribution limits to retirement plans.  This has been a key feature of both the tax plans of 2001 and 2003 and is something the Bush administration seems to be pushing rather hard given its inability to solve social security woes or for that matter even to address them.

     On Tuesday, Fed Chairman Alan Greenspan is scheduled to meet with Congress to give his Humphrey Hawkins report, his semi-annual congressional news update.  It is already expected that apart from questions surrounding the impact of war with Iraq, emphasis will be on the implications of further tax cuts and deficit spending.  In 2001, the Chairman backed Bush's tax cut, citing the potential for budget surpluses to become too much of a good thing.  Nonetheless, it will be interesting to see which way the Chairman leans this week.  If someone wanted a good test of the often touted independence of the Federal Reserve, this week's report would certainly suffice.

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

ISM Manufacturing Index:53.9%
Release Date: 2/03

• According to the ISM manufacturing index, the US manufacturing sector grew during January, though at a slower pace than in December.  The report indicated that there may be continued weakness in hiring in the manufacturing sector, despite rising orders and production.  Given the economy's current low capacity utilization, it seems that orders and production will have to rise much faster for the employment component of this index to show much improvement.

Construction Spending: 1.2%
Release Date: 2/03

• Construction spending in the US increased 1.2% in December, reaching above $850 billion during the period.  Overall construction spending figures are being dragged along by the white hot housing market which has continued to drive residential construction plans in anticipation of rising future sales.

ISM Non-Manufacturing Sector: 54.5%
Release Date: 2/05

• January's Institute for Supply Management non-manufacturing index came in at 54.5%.  According to the ISM, the non-manufacturing component of the economy has been expanding for the past year now.  Notable in January's release was an improvement in the employment survey as well as a rise in the prices component.  

Jobless Claims: 391,000
Release Date: 2/06

• Jobless claims, though elevated remained below the 400,000 mark yet again this week, but did not show significant improvement.  Jobless claims were overshadowed by the large decline posted in the headline unemployment figure on Friday.

Productivity: -0.2%
Release Date: 2/06

• Productivity in the non-farm business sector slipped on average 0.2% in the 4th quarter of 2002.  In spite of the decline, 2002 heralded the most dramatic annual increase in productivity the economy has seen in over a half a century.  The decline in productivity during the quarter was due in part to a slowdown in overall growth, but will likely be taken as a sign that the economy's blistering rate of productivity growth may finally be returning to normal.

Unemployment: 5.7%
Release Date: 2/07

• Friday's much anticipated headline unemployment figure for January came in at 5.7% a strong decline of 0.3% from December.  The release by the Bureau of Labor Statistics was largely upbeat with economists reporting that the US economy created over 140,000 jobs during the month.  A few economists cautioned that the rise may be partially the result of inaccuracies in seasonal adjustment, but only time will tell if this is the case.

Consumer Credit: -$4.0 Billion
Release Date: 2/07

• Consumer credit outstanding in the US declined by some $4 billion during December, its second consecutive monthly decline.  Falling consumer debt levels will help to balance the economy which is soon to be faced with the prospect of larger government debt levels.

Wholesale Inventories: 0.8%
Release Date: 2/07

• Wholesale inventories rose 0.8% during December, driving the often watched inventory-to-sales ratio from 1.21 to 1.23.  As it turns out, fear of conflict in the Middle East is still having a dramatic impact on wholesalers.  In particular, inventories of petroleum wholesalers surged by 16.5% during the period in anticipation of potential supply shortages. 

ECRI Future Inflation Gauge: 119.7
Release Date: 2/07

• The ECRI Future Inflation Gauge rose during January as ECRI economists cited rising inflationary pressure resulting from continued economic recovery.  This finding was echoed in both the manufacturing and non-manufacturing ISM indexes which cited both price pressure and acceleration in the rate of increase in prices during January.

ECRI Weekly Leading Index: 119.6
Release Date: 2/07

• The ECRI Weekly Leading Index rose to 119.6 from 119.3 the week before.  The gain moved the index's growth rate forward from -1% to -0.7%.  Economists for the ECRI continue to forecast weak but positive economic growth in the near future.

Site News

     As usual, I welcome comment or feedback; simply reply to this newsletter.

References

     1. The Economist Magazine, "Now for some good news" Feb 10th, 2003 Edition *Online access may require a subscription.

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Issue #139

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