Fellow
Shortrunners,
In light of the tremendous losses experienced on
Tuesday, TheShortRun has issued a statement both to offer condolences to
those affected and to support those involved in the rescue effort.
The full text of the statement is available on the main page of the
website and at the bottom of this newsletter. Rather than focus on
the tragedy itself, I feel that the most informative service that I can
provide to you is to look at some of the economic repercussions both at
home and for the global economy.
Immediately following the
events, it seems that while many in New York remained calm, panic gripped
the world's financial markets. We rapidly saw a textbook case of the
phenomenon economists dub a flight to quality. Fearing future drops
in asset value (associated with higher levels of risk), they took their
money out of the riskier assets such as securities and invested heavily in
treasuries, gold, and oil, assets which are much more stable and risk
averse. This panicked investment had several effects, not the least
of which was to bid up the values of oil, gold, and treasuries, and to
send the world's stock markets downward.
While the Treasury itself
was being evacuated, their bonds were bid up nearly 5%. Just after
the disaster, gold prices jumped over $6 per ounce. Gold is
typically seen as a sound investment when investors fear rising prices.
But its rise in price was dwarfed by trading on oil. Some reports
indicated that oil prices had jumped nearly $6 a barrel (a rise some ten
times more significant in percentage changes than that of gold).
Fortunately, cooler heads prevailed and by day's end they were up only
about $1.50 per barrel. In spite of pleas to refrain from price
gouging (which is illegal), many gas stations across the country did raise
prices to take advantage of the higher demand. In some locations,
lines at the pump evolved out of fear of a shortage.
Despite the closing of the
US markets, major markets around the globe tumbled. The Nikkei
Index, a Japanese market, which had already plunged to a 17-year low the
day before, lost further ground. Meanwhile, major stock indexes
around the world suffered as well, prompting many to expect some major
selling tomorrow. The closure of the US indices, the longest since
the Great Depression, lasted the whole week, and trading is expected to
resume tomorrow morning. As to the path the market takes tomorrow, I
won't speculate, simply because I'm not going to try to guess other
participants' opinions and I don't think that I could offer a guess that
would be any better than anyone else's.
Changing asset values is
certainly the most visible immediate impact on the economy, but there are
many more affects which will have a much more real effect in the minds of
an economist. The World Trade Center itself housed some 50,000
workers who, though they may still have a job, are lacking facilities to
work in. The 430 businesses from investment banks to insurance
companies themselves which had offices in the building have the difficult
task of accounting for employees, filing insurance claims (if they have
insurance), and finding a new location. These setbacks should
constitute major expenses for these firms and for the government. At
the same time, the suspension of the stock markets is a serious hamper on
the smooth functioning of the US economy. Perhaps even more notable
is the grounded planes, which is still an issue in many parts of the
country. These have both left individuals stranded and created a
range of major headaches for the already suffering airline industry (and
provoked Midway Airlines to announce that it will be closing its doors).
Additionally, it has slowed the delivery of goods and services across the
nation.
All the sites have the
arduous task of both investigating, recovering, and repairing. These
tasks combined with the $40 billion emergency package passed by the Senate
will help to provide a serious fiscal stimulus. This will mean
higher employment and output, and may help to offset some of the
immediately negative impacts caused by the destruction of the WTC, the
cessation of trading, and the grounding of the airlines. I've had
many people tell me that they think this will stimulate the economy,
offering wars as examples of major stimuli. I'm not sure that this
is the same type of war as previous ones, and the government's demand for
a specific make-up for society's resources may be slightly different.
I would argue that today the military and special forces will demand more
of society's scientists, engineers and planners. The crowding out in
these industries will certainly be different than crowding out caused by
say a draft. Secondly, during the majority of the significant wars
fought by the US in the earlier half of the century, when the US went off
to war, there was the employment of a resource that boosted output and
benefited society as a whole. That resource was a large untapped
workforce of women. Wars, then, were progressive in the sense that
their development helped spark the introduction of women into the labor
force, and since then, their involvement has been steadily rising,
approaching that of men. Today, this untapped body of the labor
force doesn't exist for the US economy, and the economic implications of a
serious increase in military action would likely be very different,
and perhaps not as favorable for the macro economy.
As we should know perhaps
better than many others, looking at the short run is not always the most
important economic vantage. There are many long term effects which
are much more difficult to quantify and in many instances more variable.
The first and perhaps the most talked about is the negative effect on
consumer confidence. Added to this is the prospect of future
terrorist activity and military action. Here, there is concern among
economists that fear will lead Americans to save more and fly and travel
less. Businesses, it is feared, may look to postpone investment
activities as uncertainty often clouds and hampers business decisions.
While I think these points are valid, I would like to emphasize that the
economy has been operating despite several major setbacks this week and
points such as these tend to get overemphasized sometimes.
Books can and probably will
be written about the long term implications for the airline industry.
One thing is certain, expenditures on safety measures will increase.
In fact, its likely that a range of businesses will probably invest in
further security systems and insurance policies. These policies are
economically productive in the sense that they prevent the damage of
capital, both human and industrial. Unfortunately, from a nominal
economic perspective, a society would be more productive and better off if
it didn't have both security issues or the necessary forces to stop them.
Ignoring their importance and unavoidability (because it would be far
better to have further protection and to have events such as that on
Tuesday never occur), these expenses represent added costs to American
businesses which will likely be a drag on the economy's output.
Internationally, the
repercussions have been heard in many venues. The US, which has been
viewed as a stable and strong economy, lost favor in the minds of foreign
investors. This is evidenced by the immediate devaluation of the
dollar which occurred immediately following the disaster. Investors
seeking to leave US assets drove the currency downward, bucking the
continuing trend of a rising dollar. The dollar has since
stabilized, and its likely that we've seen the end of this event's effects
on the dollar's international value. Instead of watching the dollar,
in the international markets, I think short-term focus will be paid to the
US stock market's actions this coming week, and longer-term to US demand
for imports.
Finally, I would just like
to say that on a personal note, I am deeply saddened and shocked by these
events. The massive outpouring of goodwill and patriotism that has
been shown around the world has been inspirational. I know that my
newsletter reaches many subscribers across the US and around the world,
and this has made me fearful that some of my subscribers could have been
immediately affected or harmed in these tragic events. I hope and
pray that this is not the case and that this reaches you and your families
and that all are safe and sound.
Daniel Hicks
Economic Releases
The data section
provides charts and data for the most important economic indicators.
Consumer Credit: 0.0%
-
For the month of July, consumer credit outstanding remained unchanged. This indicates that consumers have realigned spending and income much faster than most analysts had predicted. While slowing consumer spending will certainly help their budgets and prevent some economic imbalances in the economy, it could potentially damage the short run rate of economic growth in the economy, suggesting that we can expect some more poor growth figures in the near future.
Current Account: -106.0 Billion
-
The Current Account deficit contracted for the second straight quarter as consumers paired back expenditures, and to a larger relative degree, paired back expenditures on foreign goods and services. The contraction was due in a large part to a slowdown in the amount of imports purchased from abroad and to a smaller degree to improvement in the services surplus. The slowdown of the current account deficit also mirrors the slowdown in investment spending in the United States as foreigners move slightly away from US assets and the dollar ceases to appreciate to the extent which it has over the past two years.
Jobless Claims: 431,000
-
Adding to the worrisome economic news of the week, jobless claims rose some 30,000 to 432,000 this week. The jump in jobless claims is representative of a larger number of layoffs and of a slower hiring climate. The job market can also be characterized by the rising continuing claims of 3,345,000 which again indicates softer demand in the labor market.
Import
and Export Prices:
-0.1% and -0.2% respectively
-
During August the terms of trade for the United States deteriorated slightly. In spite of this, prices for import goods, including oil, are down around 4.4% from a year ago, while export prices are down only 0.9%. This data is lagged, meaning because we are looking at Augusts data, it doesn't take into account some of the events that have transpired in the past two weeks.
Producer Price Index: 0.4% (Core -0.1%)
-
The producer price index rose some 0.4% in August. This moved the year over year rate of PPI inflation to 2.1%, which is still subdued. The low inflation is largely dependent upon July's contraction in prices of nearly one whole percent, and there is the possibility that this little jump was merely a correction from the downturn experienced the month before. If we look at the core index, which is arguably more important to economists than the overall index, we see that core inflation appears to be almost non-existent.
Retail
Sales:
0.3%
-
Despite signs pointing to declining consumer spending, retail sales posted a positive gain of some 0.3% during August. Some economists have suggested that the upward tick was in a large part a manifestation of the tax rebate checks which arguably should be kicking in. Unfortunately, for the time being this is only speculation, as serious economic analysis of the impact of the rebates is not yet evident
Industrial Production: -0.8%
-
In another blow to the manufacturing sector, industrial production declined 0.8% during the month of August. Industrial production, which measures the raw output of a range of goods in the US economy, is an important indicator of manufacturing and utilities industries in the US. Capacity utilization fell to 76.2%, far below its historical average. The only positive part of the declining capacity utilization is that a lack of pressure may help alleviate supply pressures and bring costs down. At the same time, unused capital can cause major headaches for corporations, and if the US economy is to pick up, I would expect to see a re-acceleration in this figure first.
-
The ECRI Weekly Leading Index, an attempted measure of future economic activity in the United States, posted a slight decline last week. There are many obvious reasons why the index declined this week, most of which have been described previously. I would expect to see this index largely influenced by the activity of the financial markets which are likely to be volatile in the coming week.
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:
Money
and Power by Howard Means
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. The Short Run's statement concerning the events of September 11th, follows. The text can also be found on the main page of the website.
Message from The Short Run
The staff here at the Short Run are both shocked and saddened by the tragic events of September 11, 2001 in New York, Washington D.C., and Pittsburgh. The event was not a financial or economic tragedy, but a human tragedy. We would like to send our most heartfelt sympathy to the innocent victims and their families, and our undying thanks to the hundreds of firefighters and police officers who are so bravely involved in rescue attempts.
It is horrendous and unexpected tragedies such as this that should make all of us take a moment out of our busy lives and reflect on the tragic loss of human life. It should be our duty to pray for the victims, and do everything in our power to help those in need. That is why we at the Short Run are helping to raise relief funds for the American Red Cross. If you are interested in making a contribution, please click on the link on the bottom of this letter.
We hope you will join us in our efforts. But regardless of whether you make a contribution, we ask that you never forget September 11, 2001, a date that will no doubt mark the most horrendous tragedy in all of American history.
Sincerely,
Roger Kuo
Webmaster
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Issue #68
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