The Short Run Weekly Issue 76

Fellow Shortrunners,

Sometimes it is easy to get caught up in all the hoopla about falling stock prices, job cuts, and recession. Keeping these issues in mind, this week I'd like to attack several topics that I've been thinking about, in hopes of addressing some concerns and possibly sparking some debate. That said, a good question to start with is whether the recession is something that we should be worried about and what exactly its long term implications are.

Is the recession something that we have to worry about? Unfortunately, I'm going to give you the standard (and slightly irritating) economic answer: Yes and No. Yes, because the recession is real. Slower growth will mean more people will lose their jobs, and for those not falling in the top 10% of households, it will likely mean harder times. No, because the recession is not likely to change our society. Most economists believe that the recession will probably not be very deep or last very long (in relative historical terms.) Although the slowdown is present for many people it is not something that they need to worried about. Even more, it appears that long-term growth prospects are still very strong.

Some recessions change the face on an economy, other economic slowdowns are merely a wave on a curve which continues to rise. This week, productivity was released and rose during the third quarter by an annualized 2.7%. Rising productivity means that the economy can churn out even more goods with the same amount of inputs. Chairman Greenspan has continually emphasized that there were no signs that the current productivity boom had ended and this release is a key indicator that indeed the economy will continue to grow.

There are many ways to increase an economy's output, but most of these are transient. For example, if unemployment falls, output will likely rise. But this has a limit, as eventually everyone is employed (or a reasonably large majority which becomes deemed by economists to be full employment.) Another way to expand output would be to use more resources, by employing more capital and raw goods. This too has a limit. Eventually every spot on the assembly line is full or every space is full in the airplane's cargo hold.

The danger here is not in reaching capacity either. There is a large amount of free capacity in the US, to the extent that overcapacity is a large culprit when we talk about the recession. Instead, what we should worry about is too much government intervention in business, either through subsidies or initiatives. These are useful in their own right, and in many cases justified, but it is important that they be done in such a way as to be temporary and not to permanently support a non-competitive industry. There is another way besides to expand output. Increasing trade would increase the amount an economy can allocate by allowing for greater specialization. This method is also limited, not usually by its own limits (we are nowhere near complete free-trade), but by political conflict.

Recessions help make trade issues visible, and often threaten trade agreements. When the world suffers from economic slowdown as it is, trade proliferation comes under attack. Import prices are down over 7% this year, and this often makes American firms wary of their foreign competitors and leads to negative legislation that can damage the progress that has been made. That said, in the long-term, increasing trade will expand output and make everyone better off. The damage that would be done to the economy would be much more extreme and long-term if the US gives into domestic and foreign pressure to hamper trade proliferation. If we can just ride out the recession without the government becoming involved in the US and without globalization being damaged, then productivity growth through good old American creative genius will make sure that things turn out all right in the end.

Sincerely,
Daniel Hicks

Economic Releases

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

NAPM Non-Mfg: 40.6%

The NAPM non-manufacturing index dropped significantly from September to October. The release of 40.6% indicates widespread contraction, to the extent that this is the lowest recorded value the NAPM has ever reached. The drop certainly helped to give support to the Fed's rate cut, which has already come under fire from some critics who question the Fed's use of its "limited ammunition."

Consumer Credit: $3.2 Billion

Although rising higher than expected, consumer credit increased a moderate $3.2 billion during September. The increase, which amounts to less than a 2.5% annual amount, suggests that consumers are becoming more conscious of their debt burden as the economy slows and the job market weakens.

Productivity: 2.7%

In what amounts to the first real good news in recent weeks, productivity rose 2.7% in the 3rd quarter of 2001. Fundamentally, productivity releases are the key factor for long-term improvement in the US economy. Greenspan and Co. have been promising that there were no signs that technology growth was indeed slowing and that the semiconductor led productivity boom does not appear to be over by any means. Released along with productivity was unit labor costs, which decelerated. This is likely due to the loosening of the labor market and should help to keep inflationary pressure abated. The measure of hours worked declined, indicating that employers are seeking to cut back on hours as one means of preventing layoffs. However, this is typically only a temporary solution and without future growth, we may see expanded layoffs.

Wholesale Trade: -1.3%

The wholesale trade index declined some 1.3% during September. This coupled with a meager drop in inventories led the inventory/sales ratio to jump back up to 1.32, a number it has been dancing around for some time. There is not a lot of positive information to take out of this release.

Import and Export Prices: -2.4% and -0.7% respectively

Import prices contracted a strong 2.4% in October as petroleum prices overwhelmed the index. Exports, impacted by slowing demand around the world, saw their prices slip as well. Import prices are down about seven and a half percent for the year and they are likely lending a strong hand to prevent inflation and possibly to help spur investment.

Jobless Claims: 450,000

Contracting rather significantly, jobless claims were down by 46,000 last week. In spite of this, continuing claims, a more closely watched component of this release, continued to rise. Continuing claims give an indicator of the difficulty of locating a job, and measure those continually searching and claiming unemployment.

Producer Price Index: -1.6% Core: 0.5%

The producer price index continues to dip into and out of deflation and has been offering no signs of inflation for quite some time. A good portion of this has been due to falling energy prices. That said, the core index, which excludes energy and food prices, has been decelerating as well and dipped negative in October.

ECRI Weekly Leading Index: 116.4

The ECRI Weekly Leading Index rose to 116.4 last week, bolstered by rising stock prices and the falling jobless claims. The index is still far below yearly highs, but this is certainly a step in the right direction.

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