The Short Run Weekly Issue 61

Fellow Shortrunners,

The US economy grew during the second quarter of 2001 at an annualized rate of 0.7%, the slowest rate since 1993. The drop was largely spurred by a slowdown in investment spending as firms try to reconcile over-investment dating back to the start of 2000. This wasn't the only piece of bad news released this week either. The housing market, which is almost single-handedly keeping the measured economy expanding, appears to have leveled off. To make matters even more complicated, advance orders, those placed for durable good production in the near future, declined, signaling further manufacturing slowdowns.

Our favorite cartel, OPEC, dealt the markets a double blow on Wednesday. They decided to slash production by another million barrels and at the same time announced that they would hold another meeting if necessary to keep within their target range (in other words, if oil prices fall further, which they did, especially at the pump, OPEC would cut production to maintain prices). One analyst noted that the move might "affect fuel prices" and "further damage a fragile world economy." If I had been writing that article I think I would probably have substituted a "will" for the "might." Regardless of recent talks concerning energy consumption as a falling share of the typical American's budget, their presence is felt. Anyone who looks at their last credit card or checking account statement will see the immediate effects of higher prices at the pump, and the bills for cooling the house during the summer certainly aren't getting any skimpier. In spite of all this, I still find myself questioning our government’s current stance. Is increased domestic production the solution?

At first glance, the issues surrounding energy in the United States are a bit overwhelming. Bills before Congress support lower emission and higher mpg vehicles. At the same time, talks are made for tapping into strategic reserves of oil and petroleum in the Northeast and drilling in the Alaskan wildlife refuge. Debates among members of both parties continually mention support for Nuclear Power proliferation. Among environmentalists and consumers, pressure continues to fall on the President, who is somehow expected to come up with a miraculous solution. On the one hand, the president can agree to the Kyoto Accords, which would cut back on energy consumption but at the same time raise costs and prices to the typical American. On the other hand, there are those in California who are demanding cheaper energy and looking for government to solve the problem with subsidies (and thus we have the giant loan which California is considering assuming). This would do nothing to solve the real problem and only confuses the possible longer-term solutions. It makes you wonder if these Californian politicians will ever learn their lesson from too much government involvement, with all the damage that it caused in the first place.

Sincerely,
Daniel Hicks

Economic Releases

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

Existing Home Sales: -0.6%

Existing home sales fell 0.6% to 5.33 million units in June. Housing demand, which doesn't appear to be strongly growing, is still elevated and helping the economy to record positive growth numbers, such as this week’s GDP release.

Durable Goods Orders: -2.0%

During June, advance durable goods orders fell off 2%, spurred by further bloodshed in the communications industry. Orders have fallen 17.9% and 20.8% respectively in just the last two months for the communications industry, indicating a world of trouble for the industry in the short term future. Durable goods are a volatile indicator, not the least of which comes from their inclusion of aircraft orders.

Jobless Claims: 366,000

Jobless claims fell for the second straight week, easing fears created by the spike in jobless claims. This doesn't necessarily indicate a trend towards a strong labor market, but perhaps it does signal that the heightened claims of the past few weeks should be taken as transient. However, continuing claims, an indicator of longer term unemployment, appears to be trending up.

Employment Cost Index: 0.9%

The ECI, or Employment Cost Index, is up 3.9% for the year, indicating moderate inflationary pressure from rising wages and compensation costs. The ECI has cooled, as it should, with the slowdown in the labor market, and as that market continues to weaken I would look for labor market induced inflation to ease as well.

Gross Domestic Product - Q2: 0.7%

For the second quarter, growth in the United States slowed to 0.7%. Spurred by a slowdown in business investment and a draw down in inventories, the economy is showing clear signs of deceleration. Strength has been coming from the housing market and recently from the market for household appliances and furnishings. Nominal annualized GDP growth was 3.0%, representing a 2.3% rise in the inflation component of the index, the implicit price deflator.

New Home Sales: 922,000

New home sales rose in June to 922,000 units, an indication of strong demand in the housing market. It is interesting to note that despite recent interest rate cuts, the long term mortgage rate (more based on expectations of future inflation than on the current interest rate) remained constant at just over 7.0%.

ECRI Weekly Leading Index: 121.4

The ECRI Index rose to 121.4 last week. The index attempts to forecast future economic activity based on a range of financial and economic indicators. Strength in the index came from increases in jobless claims, another timely indicator which can be used to help assess trends in the labor market.

Classroom

Check out the new classroom section and watch for it to grow and change in the coming weeks as we implement drastic reconstruction to the section. Comment and suggestions as to the best method for this kind of a section would be extremely helpful.

Articles / Book Reviews

Newest Articles:

Balance East and West
- Contributed by Kautilya AKD

Bush's Tax Plan Just Doesn't Cut It
- by Alex Rothenberg

Newest Book Reviews:

The Firm, The Market and The Law by Ronald Coase
Megatrends Asia by John Naisbitt
Geography and Trade by Paul Krugman
Fuzzy Math by Paul Krugman
Growth Theory: An Exposition by Robert Solow

Site News

Check out the new additions to the book reviews section.

**Thanks for everyone who has filled out a book review for theshortrun. Once things settle down a little here, I'll get to work posting some of these on the website. Again, I appreciate your support and effort**

Interested in being a contributor to the short run? Show off your economic knowledge and breadth of learning by reviewing an economic text. Simply visit the short run's reviews section and submit your own review. If accepted, we will publish it on the website and post links to it both on the front page and in the newsletter.

If you would like to unsubscribe, simply reply with the word unsubscribe in the subject line. - DLH

Get Stock Quote: Enter Symbol(s)

Our Privacy Vow

SCREEN SAVER
Do you like our intro movie? Then download the shortrun.com screen saver now!

Get Headlines:

Issue #61

There are currently 440 subscribers to the short run weekly

theshortrun.com