Fellow
Shortrunners,
On Tuesday, the FOMC decided to cut interest rates yet another quarter point. The move represents the 7th cut this year, and brings the cumulative fall in rates to 3%. The surprising lack of economic rejuvenation sparked by these movements has had far reaching consequences both inside and outside the field of economics and has instigated a great deal of discussion on the issue.
For starters, monetary policy, some suggest, is becoming demystified. It appears that each additional move is more strongly anticipated and thus receives much less of a visible immediate economic impact than it has done over the past few years. Some analysts anticipate that the revision to last quarter's GDP growth, in light of new evidence, will show signs of economic contraction. The market for Fed Funds Futures had factored in a 100% chance of a 25 basis point cut. This means that those trading the futures fully anticipated Tuesday's cut. The only thing that they were unsure of was the slight possibility of a larger cut. Indeed, contracting GDP will lead to further pressure for future rate cuts. Among economists, the rate cuts have brought renewed interest in the study of monetary policy and its lags. The most recent publication of the Federal Reserve Bank of St. Louis featured work on this subject by several economists including Lawrence Meyer.
In spite of the talks about lags and monetary policy effectiveness, I think the focus should really be not on when will the economy rebound, but on why it is slowing in the first place. Greenspan's control and the actions of the Fed have a strong impact on credit and on economic activity in the US. They cannot, however, rectify global economic downturn. The implications of a global slowdown extend beyond declining exports and fluctuating foreign investment in the US. Often times when watching one individual economic indicator go through periods of rapid growth, we see a correction, and it's possible that slow economic growth may be nothing more than a correction from the rapid growth of the 1990's to a more sustainable rate. Indeed, a renaissance of the work of early economists from the National Bureau of Economic Research is taking place. They were pioneers in the study of events such as this, and if many are still around today, they might smile to know that indeed the Business Cycle lives on.
Daniel Hicks
Economic Releases
The data section provides charts and data for the most important economic indicators.
Treasury Budget: $2.5 Billion
- Amidst talks of a shrinking budget surplus for the year, July's budget estimates came in above expectations with a surplus of receipts over expenditures totaling some $2.5 billion. The release represents a lower budget surplus this year than last year for the period as government expenditure growth has outpaced its revenue growth.
Index of Leading Indicators:0.3%
- In July, the index of leading indicators inched upwards 0.3%. At the same time, dismally, the lagging index which measures past economic activity fell 0.7% indicating that the past few months were indeed slow. Some economists look to this and other leading indicators as a sign that the economy will likely "recover" by the end of the year. I am not sure that these indicators are really suggesting that, but if they are, recovery will be mild at best.
Jobless Claims: 393,000
- Jobless claims rose for the week to 393,000. Although jobless claims have been fluctuating above and below the 400,000 mark for some time now, their current level is clearly higher than at the start of the year and indicates that there is a much greater amount of flexibility in the labor market for businesses to work with.
Advance Durable Goods Orders: -0.6%
- During the month of July, advance orders for durable goods declined 0.6%. The largest decline was in demand for semiconductors, which are normally expected to perform well during the back to school period. Falling durable goods orders has been a sign of weakness in the manufacturing sector, a persistent thorn in the side of the new economy.
New
Home Sales: 950,000
- Showing yet another measure of resilience, new home sales jumped during July to reach 950,000. A good portion of the increase can be attributed to falling home prices, as discounting in the economy has finally reached into the housing market, perhaps helping to correct some of the run up in housing prices that had been rampant across the country.
ECRI Weekly Leading Index:
119.4
- In contrast to the index of leading indicators, the more timely ECRI weekly leading index declined last week thanks to several factors including the weakness in jobless claims. The Weekly Leading Index isn't offering a definitive path for the economy, but hopefully as we move forward a new trend will appear.
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 #65
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