Fellow Shortrunners,

     Domestically, most economic news released this week was rather well received.  Many economists are now suggesting that the US economy is beginning to recover.  The other real sign was that we could expect to have seen a little more strength in the financial markets, but given all the accounting hoopla surrounding Enron and the paranoia it has created, maybe a little inactivity is best.  In an interesting side note, former chairman of the Federal Reserve Paul Volcker was selected to head an independent team to conduct an audit of Enron's affairs.  He remains active in the financial world, where he is still known for crushing one of our country's worst bouts of inflation.  While it seems that a majority of economists are now supporting the possibility of recovery in the United States, there are legitimate concerns about the size of recovery. 

     American households and corporations remain riddled with debt.  Excessive consumer spending, failure to curb spending when wages did not grow as strongly as expected, and a lack of inflation have increased this burden.  This may curb the strength of any recovery.  With weakness in the rest of the world's markets, particularly in Japan, the US cannot hope to export its slowdown away either.  This has sparked some debate among economists as to whether the Fed was indeed correct to leave interest rates unchanged last week.  An argument could easily be made that if the lack of inflation is providing the Fed leeway to make interest rate cuts, and the real interest rate isn't even that low, then why not cut rates further to try to spark growth.  Two things work in the Fed's favor here though.  First, the end of one of our longest and deepest series of cuts sent the market a message.  It suggested that indeed there are signs of recovery.  Thus the lack of a cut may have boosted confidence.  It also leaves the Fed a little more ammunition to make future cuts.  The Fed indicated that its bias, or tilt, was to watch for future weakness in the economy.  The action leaves the Fed poised to act with further cuts should recent good news not continue.   At any rate, next week should help to provide some answers as we see the conclusion of the WTF's trade talks as well as a slew of new economic data.   As for this weeks data, I've tried to go a little more in depth with my analysis to try to give some insight as to our prospects for recovery and also because it was just an interesting week.

Economic Releases

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

New Home Sales: 946,000

• New Home Sales spiked during December.  The move is surprising considering the lackluster housing numbers we got just last week.  Furthermore, the interest rate cuts appear to have bottomed out for the time being; longer-term rates such as home mortgages typically react less to Fed moves to begin with.  Finally, December is typically a strong consumer period, for obvious seasonal reasons, but if any argument could be made, it would be that this consumer activity would put Americans in a financial state where the purchase of a new home would be more difficult.

Consumer Confidence: 97.3

• Consumer confidence rose in January to 97.3.  The increase matches what many analysts and economists have been suggesting, that indeed the economy may be showing some signs of strength.  If the 4th quarter GDP figure for 2001 remains positive (now at 0.2%), then the economy may have evaded a recession, at least in the technical sense of the word.

• Durable goods orders rose slightly in December.  Except for the fact that the increase exceeded expectations, the overall gain is not that significant.  What is important is that for the first time since the economy really began to slow, orders for computers and other IT equipment rose.  For those who see the 1990's as a semiconductor-led expansion, this news is important.  I'll wait for the next few releases to make sure that what we are seeing is more than an outlier or even the result of a seasonal factor.

GDP: 0.2%

• In the fourth quarter of 2001, gross domestic product, according to preliminary BEA estimates, rose 0.2%, far ahead of most people's gloomy predictions.  The gain is significant on technical terms because it would in fact allow the US to "escape" a recession when defined as two consecutive quarters of negative or zero GDP growth.  On a more dismal note of my own, the gain was pretty much entirely due to increased government spending.  Fiscal expansion, approaching an annual rate of 10%, included some one-time effects such as WTC recovery and clean-up efforts, as well as some permanent spending increases such as increased funding for homeland security and for the military.

Personal Income: 0.4%

• Growth in personal income outstripped growth in consumption during the month of December.  The gain in income is unexpected considering the weak performance that has been coming out of the labor market of late.  The growth was largely in wages and salaries and as such, it might be possible to try to draw a connection between the rising wages (which may be perceived as permanent income) and the increased new home sales figure.  On the other hand, consumption growth was negative, something that will not co-exist long with rising personal income.  If firms are to make enough to pay their workers higher wages, they must be selling somewhere.  One scenario would be to sell more goods abroad.  Following September 11th and an ailing global economy, this possibility is out.  A more likely explanation which works in the short run is that the government can gobble up enough output to keep wages rising despite falling personal consumption. 

Jobless Claims: 390,000

• Initial jobless claims moved upward to 390,000 for the week.  In spite of this, less sensitive measures such as moving averages still appear to be trending downward, an indication that the labor market may be improving slightly.  In any case, consumer confidence and market reactions appear to be taking recent labor market data to be a positive sign.

Employment Cost Index: 0.9%

• Growth in both wages and compensation propelled the employment cost index to gain 0.9% from the third to the fourth quarter of 2001.  The labor market still has a relatively large amount of flexibility in it, and I would look for employment-induced inflation to remain mute in the short term.

Construction Spending: 0.2%

• Gains in residential construction spending were strong enough to move this index into the green.  The rest of the components of the index declined, and barring increased public construction activities on the federal level, say for highways, construction activity is likely to decline in the near future.

Unemployment: 5.6%

• The overall unemployment rate dropped to 5.6%, a nominal sign of labor market improvement.  This is something that jobless claims had been suggesting over the past few weeks.  Under the surface, we see that the headline rate is simply masking continued weakness.  Indeed, the total number of jobs in the US declined.  The improvement was instead the structural result of a decline in the labor force.  

ISM (NAPM) Manufacturing Index: 49.9

• In what appears to be the most evident sign of a rebound in manufacturing activity in some time, the NAPM index continued to rise in January.  Although still below the 50% figure, manufacturing activity and expectations appear to have stabilized and are clearly accelerating.

ECRI Future Inflation Gauge: -0.8%

• The ECRI Future Inflation Gauge fell yet again last month, and continues to suggest that future inflation will be tame.  This is good news for the Fed, which can certainly benefit from the extra leeway to conduct monetary policy.

ECRI Weekly Leading Index: 119.4

• The ECRI Weekly Leading Index fell to 119.4 as indicators of future growth contracted, such as jobless claims.  On the other hand, the index is generally trending upwards, and most analysts are taking it to suggest that we will indeed soon see recovery.

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.    

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Issue #88

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