The Short Run Weekly Issue 78

Fellow Shortrunners,

     As I hinted at last week, oil prices have been on the decline. In parts of the country, gas at the pump has fallen below $1 a gallon and its likely to fall further. There are several causes for the decline in oil prices, and the implications are broad. First, the world economy is slumping. This means that factories around the world are closing and others are slimming down operations. In any case, demand for energy, particularly crude oil, is falling. The falling demand helped to depress energy prices below OPEC's target, triggering the group to move for output cuts to prop up the price.

     Not all of the world's oil producing nations are members of OPEC. Unfortunately for OPEC, they don't have the clout to control the world price of oil by themselves and often are forced to rely on non-member nations making voluntary cutbacks in their oil production alongside OPEC cuts. Norway has agreed to a substantial cut, but the key player, Russia, appears unwilling to compromise while its own economy is faltering. Furthermore, Russia under Putin has recently been forging stronger ties with the United States and the rest of the West, and if it hopes to continue to do so, it looks much better not helping to prop up oil prices at a time when these countries are on the brink of recession.

     Weak oil prices are important to economic recovery both in the US and abroad. Lower energy prices mean that consumers will have more to spend on other goods and lower transportation costs should help to increase trade at a time in which trade is contracting significantly. Any sort of economic stimulus should help the economy when slumping demand and excess capacity are two of its imbalances. For producers, lower production costs can help to preserve corporate profits and will soften some of the imbalances which still need to be solved by providing more leeway for firms to make investment and operational decisions.

    There certainly are obstacles to economic recovery. The housing market appears to be showing signs of weakness. The labor market, although the slowing appears to have abated, is offering little hope of recovery. Inventories are too high relative to the current amount of sales in the economy. On the other hand, depressed oil prices should help to keep inflation minimal. Low interest rates and a looser labor market should help to spur some investment and production activity, but this is limited as businesses will still need to see that consumers are willing to buy their products before they plan any expansion. Improvement in the trade balance is rapidly occurring, and a large fiscal stimulus is underway. The question then becomes, is this enough?

Sincerely,
Daniel Hicks

Economic Releases

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

Housing Starts: -1.3%

Housing starts fell during October despite low interest rates, an indication that builders are weary of further economic slowdown and uncertain about future demand for housing. Falling housing starts are just another indication that the housing market, along the stalwart of economic growth in the United States, is finally starting to show signs of slowing.

Trade Balance: -$18.7 Billion

In September the trade balance showed remarkable improvement as imports declined nearly $15 billion and exports nearly $7 billion, leaving a net change in the trade balance of $8 billion. The September data, however, is slightly complicated and should not be taken at face value. Included in this release are insurance claims after the Sept. 11th attacks and distorted travel figures.

Index of Leading Indicators: 0.3%

Showing moderate improvement, the index of leading indicators rose 0.3% in October. Released alongside the leading index was the coincident (or measure of current economic activity) index which declined 0.2% and the lagged index which shed another 0.3%.

Jobless Claims: 427,000

Initial jobless claims contracted last week, and in more promising news, so did continuing claims. This reversal if continued could spell improvement for the labor market and perhaps for the US economy, but so far there is not enough evidence to support that this trend will continue.

Treasury Budget: $-9.4 Billion

During October, the federal government spent $9.4 billion more than it took in in the form of receipts. A good deal of the increase in governmental revenue during October was made possible by changes in an accounting method used on some forms of corporate taxes, indicating that indeed spending most likely outpaced receipts by a large amount in October.

ECRI Weekly Leading Index: 117.1

The ECRI Weekly Leading Index, spurred by declining jobless claims, rose again last week to 117.1. It is now apparent that the index has been showing some strong signs of recovery over the past few weeks.

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