Fellow
Shortrunners,
Sorry for the one day delay in the newsletter. I've been vacationing and away from my computer for the past week. While I was relaxing, the US economy was doing quite the opposite, and there was a great deal of economic news for the week and we need to get caught up on the state of the economy. Recently, the brunt of economic interest has focused on the possibility for economic recovery in the US and the financial markets during the second half of the year. Although the general consensus is for a recovery in the second half of the year, recent news makes me believe otherwise.
First, productivity, by far one of the most important indicators available for the long term growth prospects of the US economy, rose 2.5% during the second quarter. On the surface this looks promising. At the same time, if we look at the components of the rise we notice that the rise in productivity was caused by a decline in employment with little change in output. This is one way to achieve productivity growth. Unfortunately it also suggests higher unemployment following a bout of over-employment and over-investment by the business community. While it probably means that output per worker has risen, it may also suggest that a good portion of those recently hired simply were not productive, and I tend to support the possibility of the latter, suggesting that firms did reach a little too far. Weaker employment conditions also have the added negative side effect of further skewing income distributions.
Consumer credit, our indicator of the populace's willingness to borrow to finance its expenses, significantly declined for the first time in nearly 3 years. Economists had expected a rise of some $8 billion in debt; compared with a release of $-1.5 billion. Market sentiment? A slowdown in the rate of borrowing and a leveling out of income and expenditures as people expect future hard times. I'm not sure if people's sentiments changed quite that significantly during the past two months. Instead, I would look to explain the falling debt with a correlated disbursement of Treasury refund checks. Milton Friedman argued in his most noted work that transitory income (of the sort of a one time tax refund) will be saved and that is what we are seeing. In economics, simple accounting suggests that using the refund to pay debt and not to go out and purchase more goods is the equivalent of saving.
Even though inflation is tame, we are still waiting to see the effects of the most recent rate cuts. Rising inventories and slowing sales provide little indication that consumer spending, the largest component of US GDP, will drive a recovery in the short term future. A flight to discounters and retailers is already evident in sectors such as retail where clothing manufacturer GAP warns of profit, suggesting that the consumers are looking to tighten their budget. A wealth-driven rise in consumer spending is unlikely amidst the poor labor market conditions, and the falling asset prices certainly won't help.
Is there a solution? Short-term prospects for growth simply haven't materialized, but longer term, if productivity growth can continue as many (including our current chairman) believe it will, then the economy will return to a steady state of growth. Instead of looking for short term solutions like tax refunds as a savior to economic woes, I would suggest that perhaps last week's discussion on business cycles is even more relevant. The US economy overreacted to the technology boom of the past few years. It takes time to readjust, and to Greenspan's credit, it seems to be doing so at a positive though markedly slower rate.
Daniel Hicks
Economic Releases
The data section provides charts and data for the most important economic indicators.
Productivity: 2.5%
- Output per hour, the standard measure of productivity in the United States rose at an annual rate of 2.5% during the second quarter. The rise in productivity is derived largely from a fall in hours worked which slipped 2.4%. Also released with productivity were unit labor costs were up a moderate 2.1%, indicating the important lack of significant inflationary pressure.
Consumer Credit: -0.9%
- Another positive release came on Tuesday, as consumer credit outstanding fell 0.7%, with a large collapse in both revolving and non-revolving credit growth. Analysts had been expecting an increase of nearly $8 billion (compared to a fall of $1.5 billion). Some analysts attributed the first major slowdown in consumer credit in several years to expectations of slower income growth. I think that the dramatic nature of this turn is something else. I believe it is consumers using their tax rebate checks to pay off their debts (essentially saving the money, as I argued in an earlier newsletter).
Wholesale Trade: -0.9%
- During June, the wholesale trade index declined 0.9% as weakness spread across sectors of the economy. The inventory to sales ratio, perhaps a more watched indicator than wholesale sales rose to 1.33, indicating danger of another buildup of inventories as consumer demand weakens faster than producers had anticipated.
Jobless
Claims: 385,000
- Jobless claims rose last week to 385,000, indicating another lapse into a slower labor market. The major component of the slowdown has been a decline in manufacturing employment, as the entire sector remains weak.
Import and Export Prices: -%1.6 and -%0.4 respectively
- The US terms of trade improved slightly last month amidst significant global disinflation and ailing global economies with smaller appetites. Despite cutbacks in production by OPEC, oil prices slid and may continue to fall as global energy demand shrinks. Imports and exports tend to be more volatile in times of great expansion and slowdown and I would to see an exaggerated movement in their prices during this "soft landing."
Producer
Price Index: -0.9%
- The producer price index a measure of supply side inflation declined in July. The release suggests that the FOMC will have a great deal of leeway in enacting monetary policy in the short term as fear of inflationary pressure, especially those related to manufacturing are virtually non-existent. The Fed will have to be wary that deflation, a phenomenon which has caused significant problems for Japan in recent years and for the US during the 1930's, doesn't become to widespread.
ECRI Weekly Leading Index:
120.9
- The ECRI Weekly Leading Index fell last week to 120.9, but appears to be stabilizing. The WLI is currently suggesting that the economy will recover, but that it will do so slowly, and I would look towards using a broader horizon for significant growth prospects in the economy.
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**
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Issue #63
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