The Short Run Weekly Issue 71

Fellow Shortrunners,

As I am writing this, the United States and England, with backing from a range of other nations, have begun bombing campaigns in Afghanistan. I'm not sure anyone at the moment really knows how successful they are, how successful we will be, or even if there will be any further terrorist actions provoked by our retaliation. It is difficult to see what the long-run implications of all of this will be. These and other questions have put the nation in a state of uncertainty. Among economists, a lot of emphasis has been placed on the massive fiscal stimulus that all this government activity will provide. Economists are social scientists too, however. They study people, and psychologically, there are a range of economic consequences that will likely occur from the attacks and from today's actions.

Economic uncertainty clouds the decision making process. Uncertainty as a general economic rule is a bad thing. Economists like to draw up models of the economy and of different situations, all of which are grounded in a set of assumptions. Recently, economists have come under fire for these often heroic assumptions, which include such as ideas as people make rational decisions and more relevant to our current situation, that there is good information/transaction clarity (lack of uncertainty). I'd like to briefly focus on some of the effects of uncertainty this week by looking at how it affects consumers, businesses, and finally, what it means for the government's role in the economy. I'm sure there is a slew of political news to be keeping up with so I'll be brief.

For individuals and families this means that they will likely slow down and become more cautious. For example a consumer might change his current travel plans. Anything that makes someone worry about the future might induce them to put aside a larger portion of their income as savings. Other individuals may take a second look at what careers they choose. For many Americans, dismal economic prospects and the threat of conflict in far away places tends to increase their incentive to remain in school (which represents a short-run drag on output and a longer-run benefit).

For businesses, longer-term planning decisions are disrupted, slowing the economy and hampering investment decisions and productivity growth. For example, when every American begins to ask questions about their future, these thoughts factor into their conceptions of what is best for a business. If executives perceive higher risks, they may shirk from the undertaking of new investment activities, choosing instead to remain cautious. When there is a movement from riskier investment prospects, we tend to see decreases in productivity growth as new, possibly successful, ventures are shelved for a later date.

For government, it means a larger role. This in turn implies a shift in society's resources, such that larger portions of its workers and capital are employed by the government. Most governmental activities don't produce some sort of tangible economic output. Safety procedures or successful reconnaissance missions, although extremely important, are not as easily quantified when it comes down to calculating some sort of measure of economic well being. That said, it is likely that a shift of more of the economy into government will slow the measured rate of "economic growth," at least in the short run.

God Bless America,
Daniel Hicks

Economic Releases

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

Personal Income: 0.2%

Personal Income for the month of August was unchanged. Interestingly enough, disposable income did change for the month with lower portions of Americans' budgets going to pay taxes. Tax rebates and cuts helped to raise the nominal savings rate to 4.1%. Consumption for the month was clearly unchanged, which may suggest that consumers are saving the rebates, suggesting that some of the tax cut's intended purpose of economic stimulus may be mute.

Construction Spending: -1.1%

In August, spending on construction projects declined a significant 1.1%. A portion of the downturn in construction is likely seasonal in nature. That said, there were significant drops in the value of completed projects for both public and private ventures suggesting that expectations of future demand for new construction project may be weakening.

NAPM Index: 47

The NAPM manufacturing index showed signs of contraction for yet another month, however the decline has become much more moderate over the past few months. For the second straight month, new orders increased slightly, which indicates that long overdue recovery may finally be approaching. The prices paid component dropped dramatically, indicating that inflationary pressure in the manufacturing industry is non-existent.

NAPM (Non-Mfg) Index: 50.2

The non-manufacturing component of the National Association of Purchasing Managers Index re-accelerated to reach another positive release. Increases in imports and exports signals that before the attack, trade liberalization may have been recovering from its recent slumps. It will be interesting to watch and see the effects of the September 11th attacks on economic integration.

Jobless Claims : 528,000

Jumping to the highest number since I've been doing this newsletter, jobless claims rose last week to 528,000. An increasing trend is clearly evident in unemployment in the United States, and releases from the Bureau of Labor Statistics confirmed this on Friday.

Unemployment: 4.9%

The overall unemployment rate remained even at 4.9% during September. Looking past the overall number, total employment in the United States dropped by almost 200,000 jobs. The drop in employment was the largest the economy has experienced in over a decade, and its unlikely that we will see improvement in the coming months, as this release has yet to take into account the terrorist attacks. Instead, the attack's economic effect will likely show up over the course of the next quarter.

Consumer Credit: 1.7%

Growth in outstanding consumer credit has almost ground to a halt. Falling from the double digits to almost zero growth, consumers appear to be grappling with their debt burdens and cutting back on their expenditures.

ECRI Future Inflation Gauge: 99.4

The ECRI future inflation remained unchanged for the month of September. The index has been steadily decreasing for nearly the past two years and suggests, just as most other indicators have been doing, that risks of inflationary pressure in the future are slim.

ECRI Weekly Leading Index: 115.5

The ECRI Weekly Leading Index has yet to suggest any serious prospects for recovery of the US economy. The WLI, which is a composite forecast derived from a group of other indicators, was bound to decline for the week amidst a range of bad economic news.

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