Fellow
Shortrunners,
The FOMC will meet yet again this Tuesday to decide the fate of monetary policy for the United States. Weakness in the US economy, combined with a lack of inflationary pressure, has everyone expecting a rate cut. Market traders who anticipate the Federal Funds Rate, trading what are known as Federal Funds Futures, have already factored in a 25 basis point rate cut and a slight possibility of a 50 basis point cut. The US economy has faltered recently, but it has not been alone. Some economists have suggested that the global economy is merely riding in the wrong direction on the coattails of the US economy. For many countries, however, the damage is much deeper than weakening US demand for their exports. The most recently and hotly debated over the past two weeks has been that of Argentina.
Argentina's economy has been in recession for several years. Add to that a public debt of $130 billion, high on a per capita basis for any country, and you have problems. After struggling through several finance ministers and presidents, the current pair, Domingo Cavallo and Ferdinand De La Rua, have been the recent news breakers. In an effort to protect the country from default, they have asked the IMF directly for an aid package. The request has been met with mixed reactions.
International investors who have become increasingly wary of the Argentine economy are hoping that a bailout package will help to save the economy and the value of their investments. At the same time, countries such as the United States are becoming increasingly reluctant to fund further bailout packages. This reluctance is not just because of the monetary contributions involved.
Financial bailouts are risky. Sometimes they fail, and perhaps even more dangerously, sometimes they succeed. When developing economies see that they can receive bailout packages and solve problems temporarily by significant deficit spending, they become more likely to take risks which can lead to excesses. Resistance to a new bailout package, therefore, is an effort to prevent the development of new and possibly dangerous precedents. However, there are other reasons for being cautious about this particular bailout. Argentina's economy is suffering even more heavily with weak export demand by the US and Brazil. This, coupled with a double-digit unemployment rate, will mean that Argentina will be unlikely to run a large current account surplus. If they can't do so, they won't ever be able to accumulate the capital necessary to pay back the international loans which they have been offered.
Daniel Hicks
Economic Releases
The data section provides charts and data for the most important economic indicators.
Retail Sales: 0.0%
- During July, retail sales remained unchanged, as automobile sales fell slightly and the broad economy showed only small signs of growth. Retail sales will be an important indicator in the coming months as we watch America's resolve towards continued consumer spending and overall optimism for the future.
Business Inventories: -0.7%
- Overall business inventories in the United States declined 0.7% during June. This indicates that businesses and manufacturers are becoming more accustomed to the slowdown and adjusting their production and purchases to better accommodate slower rates of growth. The inventory/sales ratio rose to 1.43 as sales fell even faster than the draw down in inventories.
Industrial Production: -0.1%
- Industrial production continued its downward fall last month although admittedly at a slower pace. The deceleration in the rate of decline may be indication that the manufacturing sector, which has been hardest hit during the slowdown, may be bottoming out. Capacity utilization slipped to 77%. Excess capacity in the economy will be a key element in helping to prevent supply side inflation.
NAHB
Housing Market Index:
62%
- The NAHB Housing Market Index rebounded to 62% suggesting that the housing market will continue to be the strongest component of the US economy. Strength of sales and potential future sales were cited as possible reasons for the rise in the index.
Consumer Price Index: -0.3%
- Due in a large part to declines in the price of energy, apparel, and healthcare, the overall consumer price index fell 0.3% during July. The declines indicate that the economy is clearly reducing production cost induced inflationary pressure, to the extent that deflation has begun to take place. While the fed should only be slightly wary of one significant decline like this, the lack of inflation does provide the room to maneuver.
Jobless
Claims: 380,000
- Jobless claims, a sometimes used indicator of the labor market, fell to 380,000 last week but appears to have stayed above its previous lows around 345,000. More important than jobless claims will be the headline unemployment numbers.
International
Trade: -$29.4 Billion
- The June trade balance declined to reach a higher deficit of $29.4 billion. The decline represented higher demand for foreign products, despite rising service exports. It will be important for the global economy to pick up, if the US ever hopes to improve its trade balance.
ECRI Weekly Leading Index:
120.1
- The ECRI Weekly Leading index fell to 120.1. The index has been relatively flat over the past 6 to 8 months and is not offering much hope for a short term recovery in the US 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 #64
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