Fellow Shortrunners,

     Less than a week into the war and financial markets around the world are surging.  Such activity has even elicited the common utterance "wars are good for the economy."  Nothing could be further from the truth right now.  Wars do provide a stimulus to the economy, or at least a war far from home will do so for the US economy.  It will also likely devastate the economy of Iraq, as the Persian Gulf War did a decade ago.  This destruction presents yet another worry for the US economy, as reconstruction and humanitarian relief following the war will likely carry a weighty price tag.

     So why are markets rallying?  Having seen the opening stages of the war, investors are betting that the conflict will be short lived.  There is little evidence of significant damage to Iraqi oil wells, good news for the long-term prospects of the Iraqis.  Plans are already underway to stifle the fires in the ten fields or so aflame.  Combine this news with promises and deliveries of further OPEC output and you get a sharp fall in oil prices.  Crude oil has shed about a quarter of its value since the war began, bad news for investors who bet on shortages.  It also seems unlikely that the US will need to tap into its strategic reserves.

     The initial stages of the conflict during the work week were promising with large numbers of Iraqis surrendering.  This likely boosted hopes of a rapid war.  Since then, the fighting has intensified and the escalation will likely slow the market’s rise.  It remains to be seen how strong resistance will be once US and British forces reach Baghdad.  Whatever happens, the market's signal is clear.  Investors know, as do many economists, that the US economy will be much better off once conflict in the Middle East is resolved. 

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

NAHB Housing Market Index: 52%
Release Date: 3/17

• The NAHB Housing Market index remained above 50 during March of 2003, suggesting further expansion of the white hot housing market.  A survey based index, the NAHB is suggesting that while the housing market is continuing to expand, it is doing so at a slowing pace.

Housing Starts: -11%
Release Date: 3/18

• New residential construction, often called housing starts, fell 11% to 1.62 million units in February.  A colder than anticipated month for most of the eastern portion of the US probably contributed to the downturn.  With mortgage rates low and no real prospect of rising interest rates any time soon, construction activity will likely pick back up in March.

Index of Leading Indicators: -0.4%
Release Date: 3/20

• The Conference Board's Index of Leading Indicators declined 0.4% in February.  The index has been rising for the past few months, and this release will not raise too many eyebrows unless it is protracted.  Some components will likely recover before this happens, such as falling expectations and slipping markets (which have already turned up).

Jobless Claims: 421,000
Release Date: 3/20

• For the second straight week, jobless claims remained above 420,000.  High jobless claims are a good sign that recovery in the labor market is not underway.  It will be interesting to see what happens to the job market once businesses perceive an end to the war in Iraq.

Treasury Budget: -$96.3 billion
Release Date: 3/20

• The US government ran a deficit of outlays over receipts totaling some 96.3 billion in February.  The deficit was about $30 billion larger than that run by the US the year before.  At its current pace, the federal government is on track to run its largest budget deficit ever.  Projections by the White House reach as high as a shortfall of $300 billion for the fiscal year, but even this projection does not include any of the cost of the war with Iraq.

Consumer Price Index: 0.6%
Release Date: 3/21

• The headline consumer price index rose 0.6% in February, adding to January's 0.3% increase BLS reported Friday.  Nonetheless, the core CPI, which strips away energy and food from the index, rose a moderate 0.1%, a clear indication that price pressure, at least that which would concern the Fed, is not strong.  Indeed, because the gain was sparked by rising oil prices, it is highly likely that March's CPI will see a downturn as oil prices have collapsed (Since the beginning of the war, several things have become clear.  The first was that few oil fields in Iraq are actually burning.  The second is that OPEC has stepped up to increase output -- replacing the oil exports Iraq was allowed under its food for oil program.)

ECRI Weekly Leading Index: 118.2
Release Date: 3/21

• Falling from 118.5 the week before, the ECRI WLI declined during the week.  Economists for the ECRI continued to propose that the likelihood of another recession was directly linked to the duration of conflict in the Middle East.

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Issue #145

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