The Short Run Weekly Issue 66

Fellow Shortrunners,

Several recent trends have become present in the economy. One which has become shrouded in politics and political debates has been the rapidly shrinking federal surplus. Simply put, government revenues have fallen due in part to the tax cut (although this will have more of an impact later), and in a larger part to slowing growth. At the same time, government expenditures have risen, leading to the inevitable conclusion that the surplus must shrink.

The Federal Government, however, is not the only one feeling the crunch of the slower economy. Budgetary conflicts have hit states particularly hard in areas such as the Southeast and the West, where slow growth and rising energy prices respectively have been key factors. In North Carolina, where the budget has been debated in the state legislature for months, and a balanced budget amendment is present, plans for turning the budget around have been extreme. The state which just a year ago passed a multi-billion dollar bond referendum to help its state schools and colleges obtain needed funding has been forced to raise tuition twice. The first totaled nearly 20% for in-state students and the second move increased tuition for out of state students as well.

Internationally, an economic milestone took place this week as the nations of the European Union officially launched the Euro in the form of both bills and coins. The currency is scheduled to become the legal tender of the participating European nations on January 1st of next year.

Finally, as a side note, for those who remember the weekly newsletters concerning the debt crisis in Argentina, the IMF approved a package this week to lend the government (which had begun to pay its workers in bonds because it didn't have the currency to do so otherwise) $8 billion. Total IMF aid will reach some $22 billion, but the verdict is still out on Argentina's ability to recover or to pay off its debt, which now totals well over $100 billion.

Sincerely,
Daniel Hicks

Economic Releases

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

Existing Home Sales: -3%

Existing home sales fell 3% to 5.17 million, in a move which some analysts believe to be the first real indication of slowing housing demand in the US. On a positive note, home inventories declined significantly. In the long run, this should help to balance out weakness in demand as it helps to prevent an oversupply from forming and helps keep prices aloft.

Consumer Confidence: 114.3

August's consumer confidence release slipped a little further to 114.3. The index has been strongly watched over the past few months as economic recovery in the United States is unlikely to occur without a shift in expectations towards recovery occurring first.

GDP for Q2: 0.2%

Second quarter growth was revised downwards, as had been expected, although not to the extent expected. Second quarter growth in the United States was a meager 0.2%, a drastic change from previous growth rates. Contributing to the decline were inventories and a fall in investment.

Jobless Claims: 399,000

Remaining relatively unchanged, jobless claims came in at 399,000 last week. The leveling off of jobless claims at a higher plateau will have mixed implications for the economy as it both weakens income and demand in the economy and at the same time helps to ease inflationary pressure.

Personal Income: 0.5%

Personal income in the US rose 0.5% in July, an impressive leap. At the same time, disposable income rose an astounding 1.8%. In contrast to recent trends and in spite of the back to school period, consumption rose a modest 0.1% and the "newly" (I say newly because the series has been revised in benchmark modifications) revised saving rate rose to 2.5%.

ECRI Weekly Leading Index: 119.4

Think forecasting is a perfect science? Think again. There are two major leading indexes which are strongly watched in the US economy. The first and better known is the index of leading indicators. Currently, the Index of Leading Indicators conducts three distinct forecasts of the US economy. The most commonly watched is the Index's leading indicators, which survey potential future growth. For the month of July this index rose 0.3%, indicating the possibility of expansion in the near future. The second component is the coincident index, which attempts to gauge current economic activity. It rose as well, but has been relatively stable over the past few releases. The final component is the lagging index, which offers some indication as to past economic activity. It fell for the second straight month, declining a significant 0.7%. The ECRI Weekly Leading Index remained constant on a week to week basis and has been generally declining over the past few weeks. This is indicative of a slowing US economy in the near future.

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