Fellow Shortrunners,
Just two weeks ago, Federal Reserve Chairman Alan Greenspan questioned Bush's stimulus plan. He argued that the economy's fundamentals were sound and that it wasn't clear any stimulus was even needed at the current time. A republican, his testimony to Congress signaled, for many, a blow for the president. The democrats, perceiving a whisper crusade against the chairman for his views, quickly produced a resolution showing continued support for the chairman. The economy's fundamentals are sound indeed. Unfortunately, it seems there may not be anything that really can be done to avert another recession.
The price of crude oil, commonly quoted as Brent Crude or West Texas Intermediate, broke $40 a barrel this Thursday and then backed down. Despite declining US reliance on oil, at least in historical terms, oil still plays a crucial role in the economy. At the same time, consumer expectations appear to be collapsing. It's not clear that this has translated into declining sales, but growth rates in such areas as consumer spending are certainly tailing off. The question then becomes, should we do something more for the economy?
My first inclination is to say yes. The economy stands on the brink of recession, and something should be done to prevent this. But then again, if growth rates are slow to begin with, 4th quarter GDP came in at 1.4%, a recession doesn't not necessarily mean a severely worse economy. Treasury figures suggest that the government is on track to run its biggest ever deficit, topping $300 billion this fiscal year. If this is the case, then the government is already in the process of providing a massive fiscal stimulus to the economy. Couple this with the maintenance of the lowest interest rates in nearly a half-decade in the US, and it is evident that there are a number of stimuli already being invoked in the economy. Adding further fuel to the fire is risky business.
Further government spending (or even reduced tax revenues) would increase the deficit. Deficits become implicit future taxes in the sense that they must someday be paid back. Similarly, the prevalence of deficits crowds out private investment activity, drawing from the pool of resources in the economy and raising long-term interest rates. This hits consumers via mortgages and firms via investment plans; both suddenly facing higher costs. Cutting interest rates further risks sparking inflation. Though price pressure is still rather dormant, rising oil prices are just the thing to spark price increases. Finally, it may be taken for granted that another stimulus is already in the works: war. Wars tend to boost the economy in the short run, and conflict in the Middle East would likely be no different. At any rate, war or no war, a resolution to trouble in the region would certainly bode well for the US economy, dropping fuel prices, reducing uncertainty, and helping policy makers to gauge the economy's true path.
Daniel Hicks
Economic Releases
The data section
provides charts and data for the most important economic indicators.
After two busy weeks of releases, it was a rather quiet week for economic
data.
Federal Budget: $11.1 Billion
Release Date: 2/24
- The Treasury's official budget figure fell from a surplus of $43 billion in January of last fiscal year to a more modest $11 billion surplus this January. The government is on track to post a record deficit, topping $300 billion for the fiscal year. Swelling deficits have been used as the major line of argument by Democrats and by the Fed Chairman against Bush's stimulus plan.
Existing Home Sales:
3%
Release Date: 2/25
- During January, existing home sales rose 3% to 6.09 million. The increase suggests that the housing market is still going strong, and indeed as long as interest rates remain low and potential war depresses the stock market, the housing market will remain an attractive investment option. Nonetheless, all of these factors stand in direct contrast to Thursday's dramatic fall in the NAR's new home sales release.
Advance Durable Goods:
3.3%
Release Date: 2/27
- After declining 0.4% in December, advance orders for durable goods rose 3.3% in January. The rise is good news for the manufacturing sector which is struggling not to fall back into a recession. Rising durable goods orders may also be a sign of renewed investment activity, a precursor to productivity growth and economic expansion.
New Home Sales:
-15.1%
Release Date: 2/27
- Admittedly, new home sales make up a small portion of the total housing market. Furthermore, new home sales have been riding high recently. Nonetheless, a one month new home sales fall of over 15% in January is pretty dramatic. Economists seem to be trying to move this number to the backburner and it is likely that this drop won't receive much attention unless it becomes a trend.
Jobless Claims:
417,000
Release Date: 2/27
- Thursday's weekly jobless claims report spiked above 400,000, surprising most analysts. The rise dashed hopes that jobless claims were suggesting some modest improvement in the labor market.
GDP:
1.4%
Release Date: 2/28
- During the 4th quarter, the US economy expanded at an annual rate of 1.4%. Despite slowing from previous growth figures, most analysts took the figure in a positive light. 1.4% is after all, quite a far cry from recession. The pace was largely dictated by slowing consumer spending, which rose 1.5% during the quarter. At the same time, price pressures remain irrelevant.
ECRI Weekly Leading Index: 118.7
Release Date: 2/28
- The ECRI Weekly Leading Index fell to 118.7 from 119.4 the previous week. The second consecutive week of decline has begun to worry ECRI economists who perceive the US economy as vulnerable given the high price of crude oil.
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Issue #142
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