Fellow Shortrunners,

     The markets seem focused on the Fed's pending interest rate decision, due early in the coming week.  It is interesting that the markets have attached so much interest to the FOMC's next step when there is quite a bit else going on in the world of economics these days.  First, corporate scandals appear to still be high on docket.  The SEC is just one of several government institutions set to probe into the affairs of quasi-governmental mortgage giant Freddie Mac.  The results of any proceedings should have a major impact on the company as well as on the white hot mortgage and housing markets in the States.  Furthermore, oil prices are proving as volatile as ever, even though they seem to be trending down.  Most importantly, there are tangible signs that economic growth in the US may be picking up.  Such evidence has helped fuel the debate as to the likelihood and size of a rate cut.

     On Friday, two weeks after officials for the bank of Japan spoke against inflation targets, Jim Saxton, a republican senator from New Jersey introduced yet another bill, one in a series of attempts to impose an inflation target on the Federal Reserve.  Previous newsletters have discussed the pros and cons of the issue.  In general I do not believe that the US should impose such a target on its central bank.  It has been argued recently that the ECB's focus on its inflation target may be one of the main reasons that Euro area growth is so stagnant.  The US central bank already has a great deal of credibility and has shown that it can control the price level, with inflation having largely trended down over the past two decades.  Fed Chairman Alan Greenspan is also against such a policy on the grounds that measuring the price level is a difficult task.  Indeed, several revisions have been made in recent years to the way in which inflation is measured with the effect of dramatically reducing measured inflation (i.e., attempting to take account of quality change).  As such, an inflation target can be ambiguous because of the difficulty and error involved in measuring the price level.

     Across the ocean, another big transition is occurring.  France nominated a new candidate for head of the ECB, Jean-Claude Trichet.  Trichet would replace the current President, Wim Duisenberg, as head of Europe's central bank.  The shift is occurring just after the middle of the normal 8 year term.  France was eager to choose its own head for the ECB when it was created and its candidate Trichet was delayed from taking the post by legal action from which he was recently cleared.  Duisenberg and the ECB have been criticized by economists around the world for being too hawkish in pursuit of the ECB's stated price stability goal.


Newsletter Update: I have not sent out a newsletter in a few weeks.  Whenever I complete an issue later than Monday of the working week I simply post it in the archive and don't mail it out.  The last two weeks newsletters are listed below. Previous newsletters are always available in the newsletter archive.

Issue 156 - A War on Many Fronts
Issue 155 - The Methodology of Economics

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

Housing Starts: 6.1%
Release Date: 6/17

• On Tuesday, the Commerce Department reported an increase in housing starts during May of 6.1%.  The increase was propelled by new residential construction activity.  It seems that builders expect interest rates to remain low and demand to remain elevated.  Despite relatively high volatility, the housing market continues to be a major force driving US economic growth.

Industrial Production: 0.1%
Release Date: 6/17

• During May, industrial production, a measure of the output of utilities, mines, and factories, increased 0.1%.  Though the rise was modest, the manufacturing sector can take comfort in seeing that industrial output wasn't in the red, as it has been for the past few months.  Capacity utilization remained unchanged in May at 74.3%.  At its current level, capacity utilization is well below historical norms, and excess capacity will likely stifle new investment and hiring activity.

Consumer Price Index: 0.0% Core 0.3%
Release Date: 6/17

• Headline consumer price inflation was unchanged during May.  The lack of inflation would fuel fear of deflation except for the fact that oil prices continued to fall during the month.  As a result, the lack of change in the price level is a signal that there is some price pressure in other sectors of the economy.  This fact is further evidenced by a rise of 0.3% in the core index which excludes energy and food prices.

Current Account Balance:  $136.1 billion
Release Date: 6/19

• For the first quarter of 2003, the US ran a current account deficit totaling $136.1 billion.  At this level, the current account deficit is swelling at an annual rate of 6%, and this figure is the largest quarterly figure on record.  Most economists believe the current pace of the deficit is unsustainable, and that hopefully the fall in the dollar will bring the deficit back to more reasonable levels.

Jobless Claims: 421,000
Release Date: 6/19

• Thursday's jobless claims figure improved slightly on the previous week, falling from 434,000 to 421,000.  Even more reassuring was that both moving averages of initial jobless claims (used to smooth out the series to find trends) and continuing claims (a measure of longer-term unemployment) fell.

Index of Leading Indicators: 1%
Release Date: 6/20

• The Index of Leading Indicators rose 1% in May.  The increase was large for a one month period and outpaced expectations.  The index of leading indicators attempts to predict the future course of the economy and is a heavily watched indicator of the economy.

ECRI Weekly Leading Index: 123.2
Release Date: 6/20

• Consumer spending will drive the economy to a level consistent with weak expansion, economists for the ECRI claimed Friday.  Their Weekly Leading Index rose to 123.4 last week on improvement in the labor market and further mortgage activity.  The index's long-term growth rate expanded a well.

Site News

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Issue #157

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