The Short Run Weekly Issue 67

Fellow Shortrunners,

Unemployment for the month of August came in at 4.9%, making a big splash for the week. The release surprised most analysts and has started talks about the prospect of yet another significant rate cut at the October 2nd meeting. This release on Friday more than quenched what little support the financial markets had gained from Thursday's announcement that Microsoft would remain one entity. Meanwhile, analysis by economists of leading indicators (economic indexes intended to forecast future growth) are currently suggesting about a 50% chance of a recession in the economy. Others, more pessimistic, suggest that the US economy is already in the midst of a recession.

In spite of this, hope remains. Weakness in the labor market and slowing capacity utilization for the majority of the economy will help to ease inflationary pressure. This in turn provides Greenspan and the FOMC leeway in the conduct of monetary policy. While price pressures have remained abated, there are some potential dangers under the surface which cloud this issue. A lack of capacity and inventories for home heating oil may foretell of yet another energy crisis. This could easily pinch consumers' budgets and delay recovery. Uncertainty about future levels of demand has characterized both the US and the global economy over the past few months. I suspect that it will continue to do so as long as growth remains weak, and recovery will require a change in expectations as well as a change in production.

Sincerely,
Daniel Hicks

Economic Releases

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

Construction Spending: -0.1%

Construction spending fell 0.1% during July despite strong public spending growth. In recent months, construction spending has faltered slightly, but overall the index remains elevated from strong growth in the 1990's.

NAPM Index: 47.9

The National Association of Purchasing Managers Index continued on a path of contraction which it has been following for over a year now. However, the release of 47.9 indicated a slower rate of downturn in manufacturing, suggesting that the index could potentially rebound in the near future. Among the positive components were new orders and current production, which both showed signs of acceleration and expansion.

Productivity: 2.1%

Revisions to the second quarter productivity data brought the figure to 2.1%. The gain was in effect caused by a larger drop in the amount of hours worked than in output (both of which declined for the period). Also released with productivity was a measure of inflationary pressure, unit labor costs which rose a moderate 2.7% (annualized rate) for the quarter.

Jobless Claims: 402,000

Jobless claims remained above the 400,000 mark this week, and revisions to the past few weeks saw rising jobless claims and a weaker labor market. Continuing claims, a longer term measure of unemployment and the difficulty of finding a job after one has begun searching, rose for the 3rd consecutive week.

NAPM (Non-Manufacturing): 45.5%

The non-manufacturing component of the NAPM index appears to be following in the footsteps of the manufacturing component and has begun to weaken dramatically in the past few releases. The index saw declining new orders, employment, exports, and prices. It is now starkly apparent that the slowdown which had really only severely affected the manufacturing side of the economy has now encompassed the largest component of the economy, services.

Unemployment: 4.9%

Surprising most analysts, the unemployment figure for August came in at a lofty 4.9%, indicating serious woes for the once shining labor market. The unemployment rate rose despite a significant drop in the labor force (due to many people either retiring, leaving the country, or choosing not to seek new employment). This indicates that the drop in employment was a significant one. The economy shed some 113,000 jobs for the month, bringing the cumulative five month decline to well over 300,000 jobs. Reacting to the news, major financial markets across the country declined to new lows. Investors realize that while a weaker economy may mean more rate cuts, more unemployed workers will mean less demand for companies' goods, and consequently lower corporate profits.

Wholesale Trade: 0.6%

Sales expanded during July while inventories declined some 0.7%, bringing the inventory to sales ratio back down to 1.32. The inventory to sales ratio appears to remain aloft relative to recent historical data. This indicates that for significant recovery to occur, further draw downs in inventory will first have to take place, indicating a lag for recovery of the manufacturing sector.

ECRI Future Inflation Gauge: -3%

The ECRI FIG, or Future Inflation Gauge, recorded a month to month decline of some 3% in August. The strong lack of inflationary pressure across the board in the economy should help to give the FOMC flexibility in making further rate cuts at the October 2nd meeting and in the future.

ECRI Weekly Leading Index: 119.8

The ECRI came in for the week to 119.8. In spite of this, the index remains below its level of a few months ago and expectation for short-term significant recovery just isn't present. The index itself appears to be supported strongly by the housing market and strong applications for housing mortgages, suggesting continued strength of the housing 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