Fellow Shortrunners,

     The biggest news these days is most certainly the decline of the dollar.  Or rather the prospect of  continued and inevitable decline.  On Wednesday, new Treasury Secretary John Snow played down the dollar's decline, suggesting that it posed little worry for the economy.  This vision is rather diametrically opposed to the view held by previous Secretary O'Neill who was known for supporting a strong dollar.  In spite of all the talk, I'm not convinced that the dollar's fall need be inevitable.  In spite of the rising unemployment, ballooning deficits, spiraling trade gap, and potential war, the US economy is still as healthy, if not healthier, than that of Europe and of Japan.  Productivity in the US, as measured by output per man hour, rose 4.8% last year, the highest rate of growth in over 50 years.  Though the increase was partially the result of cutbacks in employment by US businesses, at the bottom line it should help US firms to remain profitable and thus relatively more attractive to international investors.

     The dollar's fall seems to be largely influenced by a decline in foreign investment in the US.  This collapse has brought with it a corresponding decline in the US financial markets and a retreat into the housing industry with its low mortgage rates.  The decline is largely the result of the perceived risks associated with US conflict in the Middle East.  Because of this I don't believe the dollar's fall is inevitable.  Instead, I would suggest it is transitory for this very reason.  It is on the prospect of war in the Middle East that I would lay the blame of falling confidence in US markets, growing Federal deficits, escalating crude oil prices, soured US-EU relations, and general uncertainty in the US economy.  Once any conflict is resolved, and the likelihood of a prolonged war is slim, these factors should hopefully return to more normal levels.

     It does seem, however, that Americans will have to deal with a weak dollar for now, at least until the Iraqi crisis is over.  Having just spent my past two weekends vacationing in Paris and Venice respectively (my apologies for the late newsletters), I am rapidly appreciating the effect a declining dollar has on the typical American's purchasing power.  For an economy renowned for its strong consumer appetite for imports, a declining dollar can have multiple effects.  It erodes purchasing power, meaning that more and more dollars must head overseas to purchase a similar amount of goods.  In this way, this trend is self-reinforcing.  By making imports more expensive and exports cheaper, the falling should at least in the long-run force Americans to change their ways and in so doing, improve the US trade balance.  Given the current level of debt in the US, both private and public, and the expectation of further spending, an improvement in the trade balance should be a welcome thing.

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

Personal Income/Spending: 0.4%/-0.1%
Release Date: 3/03

• Personal income rose 0.3% for the second consecutive month in January.  The Commerce Department also reported a 0.1% decline in personal spending during the same period.  Analysts were quick to point out that this was largely caused by declining automobile sales.  Auto sales, which continue to cool from their previously blistering interest rate-induced sales pace, make up a large component of consumer spending, and as such the mild decline may actually signal strength in consumer spending in the rest of the economy as a whole.

Construction Spending: 1.7%
Release Date: 3/03

• Overall construction spending blew past expectations for a mild January, rising 1.7% over December to $877.9 billion.  Federal Reserve policy continues to depress mortgage rates and has driven a housing sector boom that, according to recent construction spending data, is expected to last.  Rising construction spending is a sign that builders expect mortgage rates to remain low and demand to remain elevated.  Another force driving new construction plans is a rising price ticket.  On Monday, the government reported that housing prices had risen on average almost 7% over the past year.

ISM Manufacturing Index: 50.5%
Release Date: 3/03

• Below expectations, the Institute for Supply Management (previously known as the NAPM) manufacturing index fell to 50.5% in February.  The fall ended two weeks of healthy expansion in the manufacturing sector.  The fall was largely a consequence of declining employment.  New orders and production were both growing, good news for productivity.

ISM Non-Manufacturing Index: 53.9%
Release Date: 3/05

• The ISM non-manufacturing series fared little better in February than the manufacturing.  Though still suggestive of an expanding service sector in the US, the pace of expansion contracted and price pressure rose.  There was evidence that imports are declining and exports are increasing, possibly a result of the dollar's falling international purchasing power.   

Jobless Claims: 405,000
Release Date: 3/06

• Jobless claims backed down slightly from its spike to 417,000 last week.  Initial jobless claims are still running above the crucial 400,000 mark.  There is now strong evidence that not only is the total number of jobless rising, but the time of search unemployment, in which candidates are unemployed but seeking work, is lengthening. 

Productivity: 0.8%
Release Date: 3/06

• 4th quarter productivity rose at an annualized pace of 0.8%.  Continued output growth, coupled with weak employment in the US during the year, allowed 2002 to boast the largest annual rise in productivity in over a half century, 4.8%.  In spite of this stellar growth in output per hour, if the US economy is to recover, the labor market is going to have to improve.

Unemployment: 5.8%
Release Date: 3/07

• Unemployment in the US rose to 5.8% during February.  The increase was precipitated by the shedding of some 308,000 jobs by US firms.  The job report will likely add fuel to a recent string of weak economic figures pushing the Fed to lower interest rates. 

Consumer Credit: 9.1%
Release Date: 3/07

• In January, consumer credit outstanding rose 9.1% in the US.  This was composed of a 7.6% rise in revolving credit and a rise of 10.2% in non-revolving debt.  Over the past 12 months, consumer credit is up about 4%.  Part of the recent rise in consumer credit is undoubtedly a response to continued low interest rates as well as the perception that interest rates will remain low (which in turn keep long-term rates such as mortgage rates down).

ECRI Future Inflation Gauge: 121.5
Release Date: 3/07

• Strength in the housing sector and rising commodity prices combined to increase the ECRI Future Inflation Gauge to 121.5 in February from 120.3 in January.  Economists for the ECRI suggested that inflationary pressure was finally becoming concrete enough to become a serious issue.

ECRI Weekly Leading Index: 119.1
Release Date: 3/07

• The composite ECRI WLI rose slightly last week.  At the same time, the index's growth rate fell from 0.5% to -1.0%.  The decrease was the result of a bearish week on Wall Street and the recent rise in jobless claims.

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Issue #143

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