The Short Run Weekly Issue 73

Fellow Shortrunners,

This Sunday concludes yet another week of dismal economic releases. A passage from the most recent Economist magazine suggests that the majority of their polled economists now believe that the US economy is in a recession. They suggest that the question now becomes how long and deep of a recession it will be. Unfortunately, that question really can't be answered in definite terms; we can only suggest possible outcomes for the economy. Rather than do that, I'd like to explain why it may be just too early to tell, and maybe right now isn't the time for forecasters to be drawing up conclusions for the fate of the US economy.

First, as I discussed last week, there is a great deal of uncertainty around what exactly should be done to help get the US economy out of the recession. Fears of monetary policy ineffectiveness and the like may mean that the treatment of this slowdown is different than those of the recent past. Thus, because no one knows exactly how to treat this slowdown, and only time will tell both the prescription and its effectiveness. Even more difficult to handle is that we don't know the extent to which these tools will be employed. It's hard to say that the US has done all it can do fiscally, or even with monetary policy. If there are to be future recovery packages, which it seems likely there will be, then judging their impact is even more complicated.

Second, the slowdown is not centered in the United States alone. It is much easier to predict the activities of one nation than that of a range of important economic players including Japan and the European Union. In this sense, some of the questions such as "when will economic activity and investment pick back up?" are likely out of our hands. Internationally, trading activity and financial flows have opened US markets to unprecedented levels of foreign influence. Economic research explaining differences in risk preferences between domestic and foreign investors and a host of other questions are just lacking. Moreover, with financial markets having a greater and greater influence on the everyday lives of American consumers, policy makers are finding it difficult to assess the impact of volatile markets on the economy's activity.

What this all boils down to is ambiguous. No one can really tell us with any certainty how successful recovery activities from the events of September 11th will be. Even worse, in a situation such as this, there is no clear end to the conflict and when situations lack precedents on which to build models and forecasts, the only thing we have left is something akin to a guessing game.

Sincerely,
Daniel Hicks

Economic Releases

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

Business Inventories: -0.1%

Overall business inventories shrank 0.1% during August. For the month, the inventory to sales ratio remained constant at 1.42. These figures have not yet been influenced by the events of September 11th. It will be interesting to watch recorded inventories during and after September as a barometer of how businesses respond.

Industrial Production: -1.0%

During September, industrial production shed another percentage and is down over 5% from a year ago. This decline in industrial output is representative of a recessionary US economy, and September's release is simply more pessimistic news. Capacity utilization, released with industrial production, and measuring the percent of the economy's productive resources employed, fell to a nearly twenty-year low.

NAHB Housing Market Index: 48

Showing signs of deceleration, the NAHB Housing Market Index came in at 48, indicating that the housing market in the US may be starting to show some signs of weakness. Despite the low interest rate climate, mortgage rates have been relatively stable of late, and it’s likely that the housing market may begin to feel some of the slowdown.

Housing Starts: 1.7%

Despite the downtick in the NAHB Index, on the construction front, housing starts for the month of September rose 1.7%, indicating that there is still confidence in future levels of demand. It is important to notice that overall construction plans appear largely un-phased by the attacks of September 11th.

Jobless Claims: 490,000

Jobless claims rose to 490,000 for the week. Continuing claims rose to its highest level in nearly twenty years, and it appears that the forthcoming unemployment releases will likely show much stronger deterioration.

Consumer Price Index: 0.4% (Core -0.2%)

The Consumer Price Index spiked during the month of September, increasing some 0.4% overall. Some of this was due to the volatility in energy prices and the uncertainty surrounding the aftermath of the terrorist attacks. The core index, which excludes food and energy, rose a more moderate 0.2%..

International Trade: $-27.1 Billion

Continued improvement in the overall US trade balance was evident in August's deficit of $27.1 billion. This trend will have to continue if foreign demand is going to serve in any way as substitute for ailing US demand.

ECRI Weekly Leading Index: 115.5

The ECRI Weekly Leading Index climbed slightly last week, hinting at a possible end to its downward spiral. However, it is important to watch and see if this is merely a one-time phenomenon or if a new trend develops.

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