Fellow Shortrunners,

      As the Federal Open Market Committee met Tuesday, the flurry of economic news suggesting economic recovery continues unabated.  The evidence is such that the general consensus among economic analysts seems to be that the US economy is clearly on the upswing.  It is also painfully apparent that this upswing is not going to be balanced.  There are scarce, if any, signs that the labor market will follow the rest of the economy in returning to a state of healthy growth.  Reported layoff figures are rising, initial jobless claims figures are stagnant, and continuing claims, a measure of longer term unemployment, has been steadily rising.   Similarly, with firms facing excessive amounts of spare capacity and weak demand growth, the incentive to increase the workforce is lacking.  Couple the excess capacity with dramatic productivity growth and you have an environment devoid of inflationary pressure... or at least the Fed would argue so.

    The Fed, in deciding to leave interest rates unchanged, still attempted to make a stir in the economy.  Specifically, they stated that in their press release that they feared disinflation (falling levels of inflation) more than inflation given the state of the economy and that as a result "policy accommodation can be maintained for a considerable period."  Translation, low interest rates are likely here to stay.  Why telegraph what the Fed's future plans are going to be?  The Federal Reserve has recently taken quite a bit of heat for having repeatedly argued that there were signs of recovery in the economy and as a result bumping up longer-term mortgage rates (which have spent a large portion of the last two months on the rise).  Therefore, by hinting that even though the Fed sees growth, it doesn't see inflationary pressure, thus the Fed may be working to lower long term expectations and thus flatten the yield curve.

     The result of such an action would be to make the Fed's current accommodative monetary stance a more effective stimulus on the economy, i.e., lower mortgage rates would induce further credit creation in the US.  Whether this is the right prescription for the economy is not clear.  Some economists have argued that strong productivity growth may, at least in the short run, fuel inflation.  A recovery of some sorts is clearly underway, with many indicators such as new orders and inventory levels moving in that direction.  There have also been cries that the risk of deflation is overstated.  First and foremost there is always the resilient American consumer, who seems to have weathered the past recession without giving up too much steam.  Furthermore, the government always has the ability to induce inflation through more conventional methods than credit creation such as by exercising its right to seignorage (i.e., the government can always print more money- something that might both spark inflation and help reduce the government deficit).  Nonetheless, there is a negative stigma attached to excessive governmental use of seignorage and perhaps, in the end, the Fed's subtle comments will lead the economy in the same direction without all the fanfare.

Economic Releases
The data section provides charts and data for the most important economic indicators.  I have included data from the last two weeks because I did not send out a newsletter last week.  Be careful to note the release date when looking at a specific release, in particular the weekly data such as jobless claims and ECRI WLI, which will be listed twice.

Consumer Confidence: 76.6%
Release Date: 7/29

• Bucking a quarter of recovery, the Conference Board's index of consumer confidence fell sharply from 83.5% during June to a reading of 76.6% for July.  Economists for the conference board attributed falling confidence in the economy to a lack of labor market improvement, as unemployment has often been shown to have a psychologically strong impact on individuals.

Jobless Claims: 388,000
Release Date: 7/31

• Initial jobless claims fell by 3,000 to 388,000 this Thursday.  The small movement in initial claims leaves us with yet another release hovering around the 400,000 mark.  Generally, economists use the 400,000 mark as a rule of thumb for determining when jobless claims are high enough to signal labor market deterioration.  Continuing claims rose during the same period.

Employment Cost Index: 0.9%
Release Date: 7/31

• The Department of Labor's employment cost index rose 0.9% during the last quarter.  With fears of deflation not yet erased from the minds of America's firms, a little price pressure may be just the right thing for the economy.

Gross Domestic Product:  2.4%
Release Date: 7/31

• Preliminary estimates for the second quarter show stronger economic growth in the US.  Real gross domestic product during the period expanded at an annualized rate of 2.4%.  Most analysts heralded the release as evidence that the economy is recovering.  Indeed, there was an increase in consumer spending (PCE) of 3.3%, a good sign that the American consumer is ever present.  The fastest growing component was of course national defense spending which increased at an annualized rate of 44.1% (while governmental non-defense spending fell 4.1%).  Rising imports continued to constitute a drag on overall growth.

Personal Income/Spending: 0.3%/0.3%
Release Date: 8/1

• During June, personal income and spending both rose 0.3%.  Overall balance sheets for consumers don't seem to have been improving despite a historical trend towards improvement when the economy slows down (generally in such times consumers slow their spending and thus tend to ward off things like bankruptcy and attempt to pay down debt where possible).

Construction Spending: 0.0%
Release Date: 8/1

• During June, construction spending was largely unchanged.  Market expectations had been for a modest increase and the release was consequently rather a disappointment.  Two underlying currents were readily apparent.  The first was a slowdown in private construction, indicating a slowdown in home building.  The second was a rise in new business construction, suggesting a rise in office building.

ISM Manufacturing Index: 51.8%
Release Date: 8/1

• The ISM Manufacturing Index broke 50% in July, signaling expanding manufacturing activity in the US.  The index had previously been below 50% for the past 4 months.  Manufacturing activity has generally struggled to gain ground in the US with the economy structurally shifting more towards services and manufacturing jobs moving overseas to lower cost suppliers.  The ISM manufacturing index is a survey based index and attempts to cover a range of factors that assess the entire manufacturing outlook including expectations, new orders, employment and costs.

Unemployment: 6.2%
Release Date: 8/1

• The headline rate of unemployment in the US decreased to 6.2% in spite of a reduction in employment.  The number of individuals seeking employment dropped during the month and thus the unemployment figure fell as well.  However, there is little evidence in this release to suggest any significant improvement in the labor market picture.

ECRI Future Inflation Gauge: 115.4
Release Date: 8/1

• The ECRI FIG increased to 115.4 changing directions from its recent slide.  The ECRI FIG provides yet another piece of evidence that inflationary pressure is still present in the economy and that fears of deflation are overstated.

ECRI Weekly Leading Index: 127.2
Release Date: 8/1

• Economists for the Economic Cycles Research Institute emphasized that economic recovery, though less than perfect, was still picking up in the US.  The ECRI WLI fell 0.1 to 127.2 this week.  In spite of this, the index's growth rate, a 4-week moving average of the WLI, rose above 10%.

ISM Non-Manufacturing Index: 65.1%
Release Date: 8/4

• The ISM non-manufacturing index leapt from around 60% to 65.1% in July.  The largest component increase by far was a 9% increase in new orders, with most other components improving as well.  The release should be taken as extremely good news and yet another indication that the economy is well on its way to being back on the fast track.

Wholesale Inventories: 0.0%
Release Date: 8/7

• Wholesale inventories were unchanged during June as wholesale sales rose with a large month-to-month gain of 1.5%.  Rising sales were centered in several industries including the automotive industry.

Jobless Claims: 390,000
Release Date: 8/7

• Jobless claims edged down ever so slightly from last week's reading to hit 390,000.  In a mirror image of last week's release, continued claims rose as well.  It is readily apparent that the employment situation in the US is not improving, and it will not be long before the cries of jobless recovery dominate the newsstands.

Productivity: 5.7%
Release Date: 6/20

• During the second quarter, non-farm business productivity expanded at a blazing annualized rate of 5.7%.  The increase exceeded even Wall Street's lofty expectation of a 4% rise.  At the same time, unit labor costs declined 2%.  Wall Street should be loving the results since rising productivity, in the form of higher output per hour, tends to lead to higher profits, and falling labor costs effectively does the same.  All in all, this productivity release is great news for the economy in the long run and should the labor market in the medium term by making more individuals worth hiring.

Consumer Credit: -$0.4 billion
Release Date: 6/20

• Consumer credit outstanding dropped by almost a half a billion dollars during June, the first time it has declined in over a half a year.  If this trend continues, we would expect to see improvement in household balance sheets, something that Fed Chairman Greenspan has suggested is occurring but which most other economists have argued has not yet happened largely due to America's unquenchable consumers-- a healthy thing for an economy with excess capacity.

ECRI Weekly Leading Index: 128
Release Date: 8/8

• The ECRI Weekly Leading Index continued its healthy growth trend, propelled by falling jobless claims and strong financial sector performance.  The overall index rose from 127.1 to 128 and the 4-week moving average rose to 12.5%, a two decade high.  Economists for the ECRI were quoted as saying "it is unambiguous that the economy is going to recover."

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Issue #159

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