Thursday, December 02, 2004

The Economy

The New York Times carries an AP story on retail sales in November: not good.
The International Council of Shopping Centers-UBS sales preliminary tally of 70 retailers increased 1.7 percent for November, lower than the reduced forecast of 2.5 percent to 3 percent range.
Also, a story on unemployment. The article is a bit unclear, but reports that
The Labor Department reported Thursday that new filings for unemployment insurance increased by a seasonally adjusted 25,000 to 349,000 for the week ending Nov. 27, which included the Thanksgiving Day holiday. Some analysts were expecting a smaller rise -- of around 7,000....On the layoffs front, last week's level of claims at 349,000 is consistent with a labor market in recovery, analysts say.
The number of people continuing to collect unemployment benefits, meanwhile, dropped by a sharp, seasonally adjusted 20,000 to 2.72 million for the week ending Nov. 20, the most recent period for which that information is available. That marked the lowest level since late April 2001.
In sum, the economy ain't great, but it ain't too terrible; left to itself, it will limp along.

What will be decisive is the dollar and interest rates: a falling dollar (it reached multi-year lows against the Euro and Yen) makes exports more "competitive" and imports cheaper. Both producers (exporters) and consumers (of imported goods) do better. Thus there is more income sloshing around the economy which causes it to expand: demand increases. To balance out this increased demand, producers raise prices -- which leads to an overall increase in the price level, and thus inflation. The Fed might raise rates, which weakens the economy both because it makes borrowing more expensive and so reduces demand and because it has the effect of making dollar-denominated assets more desirable and so strengthens the dollar and thus reduces exports and increases imports, to try to prevent the inflationary impact of a falling dollar. Yet this probable rise in rates hurts an already sluggish economy. It's unclear what the ideal solution is: hope that a falling dollar can accelarate the economy and worry about inflation later, or try to have a smoother ride but risk screwing up. It's hard to be Alan Greenspan.


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