The Short Run Weekly Issue 69

Fellow Shortrunners,

     Fearing a slowdown of the US economy, Chairman Greenspan slashed interest rates another 50 basis points on Monday. In what is now becoming standard in the majority of Greenspan's speeches, the FOMC noted in their press release that while the impact of the tragedy on the economy in the short-term may be negative, they reiterated that longer term prospects are still bright. Financially however, this news was overshadowed by some significant drops in the stock markets, as asset prices collapsed and continued to decline the whole week. It's hard to tell whether or not the dropping share prices have entirely been justified, and certainly the tragedy will affect different sectors of the economies in different ways.

     One of the hardest hit industries from the terrorists attacks on September 11th was the airline industry. I spoke of the effects of the tragedy last week and am going to leave the subject here. In fact, the airline industry had been suffering for some time before the attacks, for a number of reasons, not the least of which had been the slowdown in the economy. This has meant weaker shipping demand, but more harshly affected has been international shipping demand.

    Over the past few decades, international trade has been dominated by two major players. The first came from the introduction of the cargo container, which drastically reduced the cost of shipping. Containerization of freight has helped international trade to grow much faster than the economies of most nations have, contributing to increased globalization and making trade a larger portion of every nation's economic well-being. That said, the second major player has been the airlines, whose role in international trade has been growing as well. Therefore, not only does the trade depend upon the airlines, the airlines themselves then are supported by that role.

     When economies slow, demand and consumption drop. That slowdown is rarely, if ever, well distributed between different goods. For example, when a family feels less wealthy because of falling stock prices, or when someone doesn't get that big bonus at the end of the year, they typically still buy food and housing, but they may pass up the expensive dinner out, or the newest gaming machine for their child. Economists typically call this elasticity, the ratio of how reactive demand for a good is to changes in the price of that good. Goods like gasoline are called inelastic, in that if the price of the good changes or income falls, consumption of the good remains relatively stable. Other purchases such as that gaming machine or dinner out suffer much more severely falling demand when price rises or income falls, and these good are called elastic. (The inverse is true in both cases for falling prices and rising incomes.)

     One of the most interesting things to watch over the past few months as the US economy has been slowing has been the trade balance. Typically, Americans consume a lot more from abroad than they export. When the economy slows, we have seen that they have much more dramatically cut back their consumption of imports than of domestic goods. This has meant that the deficit has been improving over the past few months, bucking one of the strongest trends and altering perceptions about the trade balance as one of the most unusual economic imbalances in the economy's recent history. Theories as to the implications of the dollar overhang (the large amounts of US currency in the hands of foreigners accumulated as we purchase more from abroad then we sell). In any case, the weakening of the dollar and the slowdown of the US economy have dramatically altered discussion of international trade and its indirect effects. Hopefully, in years to come, these experiences will help economists to better understand what is and has been one of the most misunderstood components of the macro economy.

Sincerely,
Daniel Hicks

Economic Releases

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

Business Inventories: 0.4%

During the month of July, business inventories contracted 0.4%. Along with the inventory contraction was a slight up tick in sales, resulting in a drop in the inventory/sales ratio to a more modest 1.42.

Consumer Price Index: 0.1% (Core 0.2%)

Although the great majority of the nation's interest in the economy will be focused on the events of September, we are unlikely to see significant economic releases on it for quite a while. In the meantime, a great portion of our data tells us a story about the pre-September 11th economy. The core consumer price index rose 0.2% in August. This is a good sign that before the incident, price pressure in the United States was almost negligible, despite the falling interest rates.

International Trade Balance: $-28.8 Billion

With the US and world economies slowing, both imports and exports dropped. As long as the US continues to be the leader in the slowdown however, our trade balance should continue to improve as it did during July. Here, we saw yet another contraction to some $-28.8 billion for the month.

NAHB Housing Market Index: 55%

The National Association of Home Builders Market Index is a timely housing indicator, based around a scale of 50. This scaling means that releases above 50% represent expansion, and those below represent contraction in both activity and prospects for the housing market. The timeliness means that this most recent number for September is one of the first few indicators to help show economic reactions to the WTC attacks in its results.

Jobless Claims : 387,000

Every Thursday without fail, holidays excluded, a new jobless claims figure is released. This release included data up until the 15th of September. It is unlikely that we see any of the effects of the WTC attacks in this figure as layoffs in many industries, including the airline industry, were slightly lagged after the event and the process of filing a claim is not always the first course of action after a disaster such as this.

Treasury Budget: -$80 Billion

For the month of August, the US treasury recorded a deficit of $80 billion in expenditures over receipts. According to the Dismal Scientist, an economics website, expenditures are up 13.5% for the year, while receipts are up 1.4%. That said, expenditures are likely to rise drastically in light of the expenses and activities associated with the WTC attacks. Current projections still show the US running a surplus for the fiscal year, however it is likely to be cut in half.

ECRI Weekly Leading Index: 118.0

The Weekly Leading Index fell for the week largely as the WTC interrupted economic activity for the week. It will be interesting to watch and see if the WLI is able to correctly predict the direction of the US economy amidst a large portion of uncertainty that is very present at the moment.

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