ECONOMIC DATA AND DETAILS

Over the past few weeks we’ve focused so tightly on the investment banking and capital markets difficulties our country has experienced that we’ve bypassed some important economic information. The following is a synopsis of some of the more meaningful data and what it might mean to all of us.


PRICES AND INFLATION

The August PPI (Producer Price Index) fell by .9% and the CPI (Consumer Price Index) fell by .1%. These lower figures signal an overall price decrease, or deflation, in our economy largely due to decreases in the cost of oil and reduced demand brought on by higher unemployment. Such a decrease, to the extent that it simply reverses the prior inflationary trend can be healthy, but if extended too far, the implications are more complex.

Inflation was the most outwardly expressed concern of the Federal Reserve for much of the last year, as the Fed decreased interest rates to stimulate the economy. At the same time that rates were coming down, the availability of credit was tightening; and in the end the decreased rates only drove inflation by helping support higher oil prices as the US dollar weakened. Now that consumers across the globe have decreased their demand for oil, and the Fed and Treasury have tightened monetary policy enough to stabilize and strengthen the US dollar, we have actually seen a deflationary trend, which can be just as concerning overall. What the Fed missed, and what this commentary has addressed more than once over the last year, is that an economy can’t have sustained inflation without rising personal incomes. And real incomes have been stagnant for the middle class.

The cost of oil has largely continued to move lower, though derailed for several days by the credit crisis in the capital and investment banking markets. It will likely continue to do so through the end of the year. We remain firm in our expectation of crude prices between $90 and $100 per barrel by year end, with the possibility that we’ll see levels dip towards $80. This is already having a positive impact on consumers at the gas pumps, in spite of the refinery delays caused by recent hurricanes in the gulf.

Lower energy prices not only help the consumer, but also impact trade balances between the US and foreign markets. Just as important is the affect of reducing the enormous amount of US capital that we’ve been exporting to unfriendly governments - the suppliers of most of the oil we use in this country. Hundreds of billions of US dollars have entered these foreign economies, and have emboldened their leadership in their efforts against democracy at the cost of the US taxpayer.


HOUSING SALES, STARTS AND INVENTORIES

New home sales were down 11% and existing home sales were off 2.2% in August over the same period last year. Housing starts were down 6.2%. The issue here is less one of sales and starts than it is one of inventory. The inventory of homes on the national market is now at 10.3 months, meaning that if no other homes were built or went on the market it would take 10.3 months of ‘normal’ home purchasing activity to exhaust the current inventory. 10.3 months is much better than the 14 months of inventory we had some months ago, but it is still a good 7 months greater than it can be in order for housing prices to begin to regain some of their former luster, and 4 months greater than the level at which prices stabilize. Even though the un-sold inventory is decreasing, it is doing so at a painfully slow rate. This is largely due to the tight availability of money in the mortgage markets, and the increase in homes being placed on the market by sellers who aren’t turning around and purchasing another home.


MANUFACTURING AND DURABLE GOODS

The ISM (Institute for Supply Management) Manufacturing index ticked down to 49.9 in August from 50 in July. The consensus had expected no change at 50. The output components of the overall index were mixed. Stronger components included new orders, and new export orders. Weaker components included supplier deliveries, employment, and production. The prices paid component of the index declined. In all, the change in this index likely has more positive attributes than negative, but levels below 50 signal contraction, while levels higher than 50 signal expansion.

Durable goods orders were off 4.5% in August, signaling a possible reversal of the upward trend seen for most of this year. Though a decrease in durable goods orders is not unusual in August, such a large decrease is troublesome, and likely reflects the difficulty corporations and individuals are having obtaining credit with which to purchase and fund expansion.


TRADE BALANCES

The trade deficit in goods and services rose to $62.2 billion in July. Exports increased $5.4 billion in July and are up 20.1% versus last year. The gain in exports in July was led by automobiles/parts and non-monetary gold. Imports increased $8.7 billion in July and are up 16.8% versus a year ago. Crude oil accounted for most of the gain in imports in July.

Adjusted for inflation, the trade deficit in goods was $41.2 billion in July, $11.8 billion smaller than last July. Without adjusting for inflation, the trade deficit for goods and services was $4.9 billion larger than last year.

With the dramatic decline in the cost of oil, August and September Trade Balances should be much improved. The increased strength of the US dollar is partially reflective of this, too much strengthening of the dollar would put pressure on exports, as would a continued global economic slowdown.