The Short Run Weekly Issue 81

Fellow Shortrunners,

On Tuesday, the FOMC met again to decide monetary policy. Greenspan & company decided to slash interest rates another quarter of a point. Most economists and Fed watchers had expected such a move. What was instead perhaps more notable and arguably more important was the FOMC Statement which the Governors released following their meeting. Its task historically has been to allow the Federal Open Market Committee to give some of its impressions of economic activity and the justification behind its rate movements.

There are several key benefits to this action which have been discussed in previous newsletters. The most important is that giving some incite into the thoughts of the committee provides transparency. It allows market participants and businesses to have some understanding of Fed policy. The transparency combined with gradual rate movements prevent financial markets from getting shocked and they help businesses and consumers plan and adjust to rate changes.

Tuesday marked the 11th consecutive interest rate cut, by what has turned into one of the Fed's largest historical stimuli. The statement itself suggested that economic activity was "soft" and that underlying inflation (making a reference to their use of core indices) would likely move lower. This was the driving force behind their rate cut. What they did go on to say however was that they believed that the risks in the near future were toward continued economic slowdown (this section is known as a tilt), in a sense suggesting that they were unlikely to change monetary policy any time soon.

This is basically the same thing the Fed has been saying for the past 11 moves. So what's important about this release? The Fed said something else, "weakness in demand shows signs of abating." They are essentially noting that there are signs that an economic recovery will occur in the near future, something that the markets have been waiting on for quite a while. Finally, something I found amusing was that in almost a postscript they mentioned the conflict in Afghanistan and security measures at home in what amounts the most purely economic analysis I have ever read. Calling increased defense spending the "necessary reallocation of resources to enhance security," they mentioned that these efforts may constrain short-term productivity, but should have little long -term impact on longer-term productivity and economic growth.

Sincerely,
Daniel Hicks

Economic Releases

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

Wholesale Trade Index: -1.4%

The Wholesale Trade Index dropped sharply in October as wholesalers continued to suffer fallout from September 11th and an already declining economy. It will be important for wholesalers to restrain inventory build-up which could cause future economic imbalance.

Current Account: -$95 Billion

The total US Current Account Deficit declined during 3rd Quarter 2001 as the US dramatically cut back on its imports. Increased saving and a high demand elasticity with respect to imported goods has meant that import contraction has been more severe than falling exports, leading to an improved account balance.

Import and Export Prices: -1.6%

Two factors contributed to falling import and export prices in November, falling demand and falling commodity prices. The improvement in US terms of trade of 1.6% was largely the result of continual declines in petroleum prices which tend to skew a lot of economic data.

Producer Price Index: -0.6% Core 0.2%

Another index which is largely impacted by the price of energy, the producer price index , fell during November by 0.6%. Excluding the volatility of agricultural and energy inputs the index actually recorded a minor 0.2% increase, in line with the Fed's ambition of price stability.

Retail Sales: -3.7%

Retail sales fell 3.7% during November with significant declines in several categories ranging from automobiles to food services. Declining retail sales is a good sign that the economy is indeed in a recession and that things are continuing to slow down.

Jobless Claims: 394,000

In a more positive move, jobless claims feel to 394,000 last week. The move represented a significant drop from the previous week and may portend overall improvement in the labor market despite the soft economy.

Consumer Price Index: 0.0% Core 0.4%

Consumer prices were largely unchanged during November as a result of declining energy costs. Factoring these out, inflation actually surged, rising some 0.4%. If this trend continues it could easily put a halt on further Fed plans to stimulate the economy as curtailing inflation could easily become a primary focus.

Industrial Production: -0.3%

In yet another consecutive decline, industrial production dropped 0.3% during November. Continued falling industrial output is a clear sign that the manufacturing industry is continuing to suffer heavily.

Business Inventories: -1.4%

Business inventories dramatically declined in October as firms sought to counterbalance the recent build-ups. The cutback in inventory has moved the overall inventory to sales ratio to 1.39, and the overall release is a good sign for reducing economic imbalance in the economy and for building future demand..

ECRI Weekly Leading Index: 1.1%

Thanks to declining inventories, a stable stock market, and the significant drop in jobless claims, the WLI moved forward last week, improving to 119.5.

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