Fellow Shortrunners,

      The economy is sending mixed signals as to which path it intends to take.  For the most part, economists don't seem to have much to agree on except that the recovery certainly isn't happening right now.  In fact, some economists have even begun to question the eleven interest rate cuts of 2001.  Interest rates in the United States are at 40 year lows and the cuts are taking place in an economy that is known for its exuberance and one which is already receiving fiscal stimuli.  Indeed rising joblessness and falling demand merit action, but some skeptics argue that taking interest rates too low could be damaging as well.

     The Fed under Alan Greenspan has been well respected for several reasons, and its control over inflation and its gradual (non-shocking) moves are not the least of these.  If interests rates sink too far, excess liquidity in the system could easily lead to inflated stock prices, excessive demand, and in short time, inflation.  Supporters of the Fed might argue that while this may occur, the Fed could and would act to prevent perceived inflation by reigning in interest rates. Indeed this is how the term counter-cyclical came to be applied to monetary policy because it would act against the economic cycle, to temper growth and shorten slowdowns.  I would argue in support of the Fed as well, but there are still other obstacles.

     If interest rates are indeed too low (they've fallen much lower than say those of the ECB, which are typically more responsive to our actions), then two immediate worries come to mind.  The first is the Keynesian idea of a liquidity trap, which has been generally ruled out as a possibility for the US economy.  The second danger would surface if the Fed needed to raise rates rapidly to restrain inflation.  In this case, the markets, which have become accustomed to lower interest rates of late, (and likely take a large chunk of their current valuations from the low interest rate climate) might be overly susceptible to rate hikes.  This would be especially true if stocks are indeed overvalued at current levels as many doomsday analysts like to continue chiming.  Again here though, its hard to say that the Fed is not making the right decisions given its current situation.  If indeed it needed to raise interest rates to curtail inflation, it would do so and probably continue to state that it does not not make policy based on the stock market.  While the influence of the stock market on the "real economy" does appear to growing, I think the fall in asset values in 2001 was a humbling experience for the markets and is likely to help curtail volatility and its impact on the economy.  Indeed a weaker stock market may just have given the Fed enough room to make its rate cuts, which combined with the tax cut and September 11th relief efforts are providing a massive stimulus to the economy, without the worry of excessive inflation.

Economic Releases

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

NAPM (ISM) Index: 48.2

• The National Association of Purchasing Managers changed its name to kick off the new year.  The organization's new title will be the Institute for Supply Management (ISM).  The associations data releases will now be called ISM indices (for manufacturing and non-manufacturing).  Although the manufacturing release for December of 48.2 showed continued contraction, acceleration was notable.  A recovery trend is clearly apparent which could mark the end of what has become a devastating contraction for manufacturing in the US.  

Construction Spending: 0.8%

• During November, construction activity rose another notch, increasing by 0.8%.  The increase is likely due to some spillover of increased economic activity as well as a favorably mild winter which is allowing for easier construction activity as well as cheaper input costs (by cutting the demand for energy).

Jobless Claims: 447,000

• Jobless claims which appeared to be slackening rose slightly last week an early indication that the BLS unemployment figure due out later in the week would not show strong signs of labor market recovery.

Unemployment: 5.8%

• The unemployment rate rose slightly in December to 5.8% as the economy shed more jobs.  A loose labor market will be key to preventing inflation spurred by low interest rates, but joblessness in and of itself will be a significant damper on economic activity.  

• The non-manufacturing component of the NAPM grew last month, in a strong rebound from some depressed figures.  The survey-based non-manufacturing index has become more and more important to analysts as the service sector of the economy continues to grow and this release will help to lift expectations of future recovery.

• Given slackening demand and labor market conditions it is not surprising that the ECRI is predicting little inflationary pressure in the near future.  

• In a strong turnaround, the ECRI WLI collapsed last week, falling over 5%.  A broad slowdown in the composite index's figures contributed to the change, which has dampened the index's predictions of a recovery around the corner.

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

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Balance East and West
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Bush's Tax Plan Just Doesn't Cut It
- by Alex Rothenberg

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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

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Issue #84

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