Fellow Shortrunners,

     After a great deal of time and effort by fellow short runner Roger Kuo, I am pleased to announce the launch of the new Short Run Interactive Chartroom.  Visitors can find it on the website by choosing the charts link from the main page or by visiting http://www.theshortrun.com/chartroom/chartroom.html. The Chartroom features an expanded group of up-to-date data series for a broad range of domestic and international indicators. As well as providing historical data series, the interactive chartroom lives up to its name by allowing users to view and use nearly 150 different economic graphs in time intervals ranging from 3 to 5 to 10 years.

     As the manufacturing sector of the US economy continues to deteriorate, a group of leading businessmen from a range of industries met with the Treasury this week. Their goal? To convince the US government that it should take some action to do what international economists often call "intervention." These manufacturing industries are hoping that the US Treasury will take action to devalue the dollar. A weaker dollar will help these industries to export their products as well as prevent domestic competition from international sources. The Treasury however made no set deal with the businessmen, it didn't even offer a yes or no.  This does not mean that their trip was in vain though.  Is a weaker dollar something that the US economy needs right now?

     A glimpse of increased exports and their possible support to the ailing manufacturing sector of the economy is indeed appealing. Heck, any improvement in the trade balance will help to cut down on an imbalance economists have termed the dollar overhang.  Increased exports should also help to improve economic growth in the US.  Unfortunately though, any devaluation in the dollar cannot come without its costs. And as usual in economics, the typical American consumer is likely to feel the brunt of a devaluation as his imports will now cost him more dollars. If we view the slowdown as the result of a credit crunch and too much indebtedness on the part of American firms and households then a devaluation may be dangerous.

     Perhaps even more worrisome is the potential repercussions from active US currency intervention. If the US takes actions to alter the value of the dollar above and beyond those considered normal for a free market economy, then the US could set a precarious standard. The US is often viewed as a model economy and if it intervenes with the dollar, say the way the Japanese do with the Yen, then other countries may follow the example. A floating exchange rate should in theory work best with a lack of government intervention. If the US economy is indeed weakening and interest rates are falling, then we should look for market forces to move exchange rates to more "acceptable levels." Indeed, if the US economy continues to contract relative to the global economy, I would look for the dollar to do just that.

Economic Releases

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

Retail Sales: -0.1%

• During December, retail sales fell slightly as the pace of automobile sales cooled. The lack of strong growth in December is a good sign that holiday season sales growth was well below rates that retailers had been hoping for.

NAHB Housing Market Index: 61

• The National Association of Home Builders Index rebounded in January. Strength in the housing market has helped to support the economy so far, but without broad economic recovery, the US economy will not escape its current recession.

Industrial Production: -0.1%

• Industrial production continued to contract during December as prospects for the manufacturing sector don't appear to be improving significantly.  Slackening demand will certainly lead to future weakness in industrial production. Capacity Utilization, also released by the Federal Reserve Board, dropped to 74.4%. Falling capacity utilization is consistent with the declines in industrial production and should help to prevent supply bottlenecks and inflationary pressure.

• Overall business inventories contracted in November, a continuing trend which we have seen over the past few months as firms have sought to alleviate excessive inventory buildup. The inventory to sales ratio, an arguably more watched indicator that overall business inventories, remained constant at 1.39. Inventory reduction is a necessary reaction for businesses if the economy hopes to escape recession.

• The consumer price index, including food and energy, dropped 0.2% last month. The core index rose a slight 0.1%. Lack of headline inflation in the US economy should give a boost to business morale and to the Fed. It should also help to silence criticism of the pace at which the Fed has been loosening monetary policy.

• Initial jobless claims fell to 384,000 last week. With jobless claims staying below 400,000, it is possible that we will see some improvement in the overall unemployment figure.

Housing Starts: 1.57 Million Units

• December's Housing Starts figure was rather disappointing. Falling housing starts is an indication that while the housing market may be holding up today, expectations are that it will deteriorate in the future. Long-term expectations are a key indicator of business and consumer activity.

Trade Balance: $27.9 Billion

• The trade balance improved in November. The movement came in two parts, as US exports rose and US imports fell. Improvement in the trade balance is a result of a weaker domestic economy relative to the world economy, more so than any other trend. I would not look for increased exports to help keep the US economy afloat as it often does for many other nations.

ECRI Weekly Leading Index: 0.9%

• A rough week for Wall Street helped to drop the composite ECRI WLI to 120.3. In spite of the week's decline, the index appears to be trending up, and as a predictor of future activity, it should still be viewed optimistically.

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:

Recipe for Disaster: The Rise and Fall of Currency Boards in Argentina
- Richard Carew

Balance East and West
- Contributed by Kautilya AKD

Site News

     Check out the new additions to the book reviews section.

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Issue #86

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