The Short Run Weekly Issue 80

Fellow Shortrunners,

Several significant economic developments occurred this week. First, we've been watching oil prices recently, as OPEC has flirted with the possibility of cutting production. Fortunately for consumers, Russia (a non-OPEC nation) has refused to match what OPEC would like to see in production cuts. On Wednesday, in an apparent 180, Russia agreed to slash its production by 150,000 barrels per day. Unfortunately for OPEC however, oil prices are unlikely to react significantly.

One of the most heavily populated portions of the world's largest energy consuming nations, the east coast, has been experiencing an unusually warm winter. The warmth has quelled demand for oil to power things such as home heating, and combined with shrinking output, the slackened demand is preventing upward movement in oil prices. Furthermore, many traders are skeptical about the effects of Russia's promise to cut oil production. Historically, the extreme cold of the Russian winter forces the country to cut back on its oil production by nearly as many barrels. Other economists argue that Russia's oil industry is already largely privatized. If so, its government will have a hard time constraining its industry's output. The "cheating" problem is further aggravated by an already established regime of corruption and poor statistical accounting.

Another of my favorite topics made the news again this week. The Argentine government, in an effort to prevent default on its $135 billion debt, passed currency controls. The controls essentially amount to a decree that Argentines cannot remove more than $1000 per month from their bank accounts. The move was made in response to a large outflow of currency. The government would have had to cover further currency flights to preserve its currency peg and its central bank's reserves were falling. At present, there doesn't appear to be a lot of promising things that Argentina can do.

First, some argue that Argentina could completely dollarize, this movement would end currency speculation on its banks ability to produce pesos but it would represent a total loss of monetary autonomy. Second, it could look to restructure its debt, but this has been done time and time again and would amount to nothing more than delaying a default. Finally, Argentina's economy has begun to seriously contract and its ability to export to meet its debt payments is unlikely given the current global slowdown.

Help could come from the IMF, but as is typical such help would come with stipulations. Most likely, the IMF would push Argentina to devalue the peso relative to the dollar (i.e. to shift its pegging away from one peso to one dollar). Such a move is dangerous for the nation however because if citizens fear devaluations, they will attempt to move all their currency into dollars. Another possible IMF demand could be for complete dollarization, as I described earlier. Economists are divided on what is best for the nation, with some advocating dollarization and others advocating floating the currency. Whatever happens, Argentina's economy is likely to be thrown further in turmoil.

Sincerely,
Daniel Hicks

Economic Releases

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

Construction Spending: 1.9%

The first in a rash of good economic releases during the week, construction spending for the month of October increased at an annual rate of 1.9%. The rise more than made up for September's decline and is good news for an ailing economy.

Personal Income: 0.0%

Personal income was largely unchanged during October. At the same time however, American consumers shrugged off September's slowdown, to increase consumption expenditures by nearly 3%. It should be noted that the climate of low interest rates is providing incentive for the purchase of large ticket items such as homes and cars. One of the most significant gains in consumption activity was experienced by the automobile industry.

NAPM Manufacturing: 45.5%

The National Association of Purchasing Managers manufacturing index showed some sign of acceleration despite still negative results. September 11th's effects on the survey based index have been strong and this November release should still be looked at positively as a recovery from the disastrous numbers associated with September and October.

NAPM Non-Manufacturing: 51.3%

In an even stronger recovery than its sister index, the non-manufacturing NAPM recovered strongly in November and is actually indicating some signs of expansion in the service sector of the US economy. Continually evident in these two indexes is a shift in the US economy from manufacturing into service.

Productivity: 1.5%

Productivity decelerated slightly during the third quarter. The increase was caused by a larger decline in the amount of work done relative to the decline in output (both of which were significant in size). It is clear that the US economy is in a recession and while productivity growth is still positive and long-run prospects remain good, short-term employment and output figures are likely to be dreary.

Jobless Claims: 475,000

Jobless claims dipped slightly last week, adding to the bit of good news that was necessary to get the financial markets moving. More important than the slight drop in initial jobless claims, however, was a substantial drop in continuing claims, a sign that indeed the employment picture may be stabilizing.

Unemployment: 5.7%

Unemployment in the US increased in November as the economy shed some 300,000 jobs. The overall unemployment rate rose to 5.7%. The labor market by appears to have shed its tightness and should the economy pick back up, it could be a good time for both employers and job seekers.

Consumer Credit: $7.0 Billion

Outstanding consumer credit rose by some $7.0 billion during October. Interestingly enough, where as the past few increases in consumer credit before the economy began to slow down were in revolving debt (i.e. credit card spending) this increase was in non-revolving debt. Low-interest rates (O% APR on all new vehicles!) have led consumers to stock up on longer term debt.

ECRI Future Inflation Gauge: -1.3%

The ECRI Future Inflation Gauge dipped another 1.3% as a weakening labor market and falling oil prices sent clear messages that inflationary pressure in the near-term is likely to be mute.

ECRI Weekly Leading Index: 1.1%

The ECRI WLI rose 1.1%. The increase was largely a function of a modest recovery in the financial markets bringing the Dow above 10,000 and the Nasdaq above 2,000.

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