Fellow Shortrunners,

     Quite a bit of data this week so I'll be brief and just recap some of the major economic news.  Reports of economic weakness in the EU and in Japan came out this week, adding to strong signs of deflationary pressure in several major price indices to deliver a hectic week.  A good portion of recent falling prices in the US is due to a decrease in crude oil prices in April of nearly 25%.  This has translated into a fall of about 6% in gasoline prices across the country.  It seems that much of the run up in the oil price before the war with Iraq has been erased.  The dollar continued to decline this week against the Euro and is receiving little support from politicians and the fed chairman who seem unconcerned.  The only one's who seem really concerned are the economists of the bank of Japan who are desperate for economic growth and thus are attempting to devalue the yen to keep it weak relative to the dollar.

     There are a number of reasons not to be overly concerned about the declining dollar right now.  The main one is that it will likely improve the current account balance, allowing the US to right its balance of trade figures which are already far beyond historically sustainable levels.  Furthermore, there is little reason to believe that a fall in the dollar, provided that it does not signal a new trend of a weaker currency, should have a negative impact on investment in the US.  Provided that the US can show that its economy is stronger than that of the majority of the developed world (as it currently seems to be), than the dollar will likely recover.  Furthermore, following its introduction, the Euro, the dollar's main competitor declined sharply.  Thus, the recent rise in the dollar may partially a correction for the Euro's previous weakness.  More likely however is that the Euro is taking strength from higher Euro area interest rates.  If this is indeed the case, then in all likelihood the Euro will slip once the ECB is forced to cut rates.  Given weakness in Germany and France this is an all too distinct possibility.

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

Trade balance: -$43.5 billion
Release Date: 5/13

• On the strength of rising imports, in spite of the falling dollar, the US trade deficit swelled by 7.6% in March to a near-record $43.5 billion.  The deficit was partially due to inflated oil import figures, as wholesalers attempted to stockpile crude oil in advance of the conflict with Iraq.  Analysts are still suggesting however, that the larger than expected increase in the Trade deficit is likely to trim a little bit off of the preliminary estimates for GDP.  With the euro-zone economy faltering, it is not clear when the US trade gap will improve.

Import/Export Prices: -2.7%/-0.1%
Release Date: 5/14

• During April, import prices fell off sharply, declining some 2.7%.  The largest ever one month decrease in the index is attributable to a hefty decline in petroleum prices for obvious reasons.  Export prices slipped 0.1% during the same period.  Falling import and export prices are going to be compounded with this weeks weak price figures to add fuel to concerns over deflationary pressure.

Retail Sales: -0.1%
Release Date: 5/14

• Total retail sales for the month of April declined 0.1%, reversing direction from the index's positive March release.  Weak consumer activity is bad news for an economy in danger of slipping into recession and lacking adequate demand to support prices.  Continued weak releases such as this will likely lead policy makers to further attempt to stimulate the US economy through a combination of tax cuts, spending plans, or accommodative monetary policy.   

Producer Price Index: -1.9%
Release Date: 5/15

• During April, the producer price index fell a sizeable 1.9%.  The more heavily watched core PPI, which attempts to exclude some measure of volatility by ignoring food and energy prices, fell 0.9%.  Both declines were well above expectations and are giving substance to last weeks deflation warnings by the Federal Reserve.

Industrial Production: -0.5%
Release Date: 5/15

• On Thursday, the Federal Reserve reported that industrial production (a measure of the raw output of factories, mines and utilities across the country) declined 0.5% in April.  The release was accompanied by a report of further declines in capacity utilization.  Overall capacity utilization declined from 74.8% to 74.4% during the month.  Falling industrial production and capacity utilization is bad news for the economy and for the manufacturing sector in particular.  At a time in which all the rage centers around falling prices, these two trends will further reinforce firms inability to exercise pricing power and will likely stave off new investment plans and hiring activity.

Jobless Claims: 417,000
Release Date: 5/15

• Falling from an upwardly revised figure of 440,000 the week before, last weeks initial jobless claims release is suggestive of a weak labor market.  Continuing claims continued to rise, increasing to a hefty 3.77 million for the week.

Consumer Price Index: -0.3%
Release Date: 5/16

• Carried by the momentum of falling oil prices, the headline consumer price index declined 0.3% last month.  The core CPI was unchanged during the same period.  Falling price levels is alarming to both US businesses and policy makers.  It is unlikely, with the situation in Iraq calming down, and the world's major economies struggling, that prices will pick up in the near future. 

Housing Starts: -6.8%
Release Date: 5/16

• Housing starts edged off slightly in April, falling some 6.8% on a month over month basis.  Despite recent volatility, housing starts are still running at a historically high level and the housing market as a whole continues to outperform the rest of the US economy.

ECRI Weekly Leading Index: 122.4
Release Date: 5/16

• The ECRI WLI gained ground last week rising from 121.9 to 122.4.  The increase was the result of positive figures in most all of the components of the composite index.  The index's growth rate, an attempt to smooth out weekly fluctuations, increased to 2.1% from 0.9%. 

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Issue #153

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