The Short Run Weekly Issue 75

Fellow Shortrunners,

This week, some of the September and October economic releases became available for the first time, confirming what a great majority of economists already feared. Gross domestic product declined during the third quarter, suggesting that in all likelihood the economy is in a recession. Unemployment rose to 5.4%, a hefty increase amidst a rash of job cuts. Consumer confidence and the NAPM index shrank to new lows, and decreased consumer activity is actually pushing the US saving rate back to normal levels. Similar economic growth issues are confronting other nations around the world.

The United States has been trying to counteract this with monetary policy and recently with fiscal policy. But there are limitations. Fiscal policy itself certainly has drawbacks, such as increased debt and possibly higher interest rates, but may provide the solution. Monetary policy in the US is in fact in danger. The releases this week suggest that the Fed should cut interest rates, but cutting rates 50% or even 25% should push some real interest rates close to or even below zero. Without the ability to cut interest rates, the Fed's ability to impact the economy is severely impacted. It has other tools, but by far its favorite mechanism is to control interest rates.

In Europe, just the opposite is the case. There, interest rates are higher, leaving more leeway for cuts. On top of that, the EU imposes budgetary restraints which will prevent individual countries from the free practice of fiscal policy. Even more, the EU requirements will couple with already present debts, limiting fiscal activity. These limitations may bring into question some of these constraints. In Japan, where it appears that both monetary and fiscal policy are failing, economists and policy makers are drastically looking for solutions.

Failure of conventional economic answers to address global slowdown is both fearful and intriguing. First, it suggests that there is certainly more to be learned and hopefully economists and researchers will devote more attention to understanding fluctuations in economic activity. Unfortunately, this represents a significant lag, meaning the discovery and implementation of new policy prescriptions will be a slow process. Finally, on a side note, I would like to thank everyone who visited the chat room and got involved in the discussions on the website. Hopefully this can become a useful place to ask questions and debate economic issues.

Sincerely,
Daniel Hicks

Economic Releases

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

Treasury Budget: $35.4 Billion

During September the federal government ran a small surplus, nearly half that of September 2000. Given current economic conditions, the overall surplus is likely to shrink rapidly, and it's very conceivable that the US will find itself to be deficit spending again. Some of the already passed recovery efforts have not yet been paid for, and I would look to see their negative impact on the budgetary situation in the future.

Consumer Confidence: 85.5

Well below expectations, consumer confidence plummeted to 85.5. Because the conference board's consumer confidence figure is so closely watched, this downturn is likely to make some waves among economists and policymakers alike. Consumer confidence itself is key to economic recovery as increased consumption as well as an end to some of the economies imbalances are likely necessary for sustained improvement.

GDP 3^rd Quarter: -0.4%

GDP during the third quarter declined as anticipated. The drop of 0.4% signaled the first time the economy has contracted during this slowdown. The release is preliminary, and as such, figures surrounding September and the following months contain a large amount of estimation. That said, we are likely to see some significant revisions to this figure which could strongly impact the release one way or the other.

Jobless Claims: 499,000

Jobless claims improved slightly to 499,000 last week. Although not worse, this is not exactly a strong sign of improvement either. Continuing claims rose yet again, and this release, although positive, does not foreshadow improvement in the labor market.

Construction Spending: -0.4%

Jobless claims improved slightly to 499,000 last week. Although not worse, this is not exactly a strong sign of improvement either. Continuing claims rose yet again, and this release, although positive, does not foreshadow improvement in the labor market.

Personal Income: 0.0%

Personal income remained unchanged during September. Personal consumption did not. It contracted some 1.8%, raising the saving rate to some 4.7%, a drastic change from its recorded values a few months ago. Rising levels of personal savings are helping to negate some personal imbalances such as the recent build up in personal debt.

NAPM Index: 39.8

The National Association of Purchasing Managers index fell to its lowest recorded value in over a decade, the accumulation of 15 months of deceleration. The sharpest decline in the index was in the prices paid component which recorded a strong decline. This is an indication that inflationary pressure still remains non-existent. In fact, it is possible that in some sectors of the economy, deflation may actually be present.

Unemployment: 5.4%

The unemployment rate rose drastically to 5.4%, a clear sign of weakness in the US economy, and a signal that recession is imminent. The change in overall employment in the economy has been negative for the past quarter, which means that while the labor force has been increasing, the actual number of jobs available has been shrinking.

ECRI FIG: 5.4%

The ECRI Future Inflation Gauge declined 3.2% and is down nearly 20% for the year. The index is a composite that attempts to forecast future inflation, and as such is telling us that inflationary pressure in the near future is likely to be insignificant.

ECRI Weekly Leading Index: 114.4

The ECRI WLI rose slightly to 114.4. Given the quantity and size of negative releases this week I would not look for much attention to shift towards this index. More can be read from looking at some of the more traditional and current indexes which are suggesting that the economy is really falling.

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