Economic Update:  National Indicators

11.20.2009

It has been a slow couple of weeks for local economic data releases.   So this week, we’ll take a look at a few national indicators.   If you are busy, just take the section that interests you, and come back later for the other sections. 

Housing

Housing took a slight dive this week when we learned that housing starts declined unexpectedly.   A Homebuilder’s Index, measuring optimism among homebuilders, also declined slightly from the previous month.  During our Outlook breakfast last week, we indicated that the greatest threat to the housing recovery is a sustained rate of high unemployment.   Nationally, unemployment remains high, and this will continue to contribute to distressed sales and foreclosures.   National foreclosures continue to increase, and the most recent local data indicate that mortgage delinquencies continue to worsen.

Housing certainly received a boost from the $8,000 tax credit and this spurred home sales and new construction.  Builders likely pulled back due to the expected termination of the $8,000 tax credit on December 1.  Congress has now sent an extension to the President, and we’ll likely see a resumption of housing starts in the near future.

Chairman Ben Bernanke actually touched on the impact of unemployment on the overall recovery.  In talk this week, he indicated that unemployment and tight bank credit would be the primary reasons for a slow recovery.

Source:  Barrons.com

Manufacturing

We continue to see a recovery in manufacturing, although mixed signals were received this week.  First, the Empire Manufacturing Survey showed an unexpected decline in manufacturing for the New York region.  On the other hand, the Philadelphia region reported a larger than expected increase in that area’s manufacturing, the largest increase in two years.  We also learned that industrial production was up only slightly, and much lower than the previous three months. 

Here is my take on this data.  The nation will continue to observe a recovery in the economy and in manufacturing.  However, the manufacturing recovery is being led primarily by restocking of inventories and not necessarily strong consumer demand.  Beyond the inventory re-stocking phase, consumer demand is going to be relatively mild, and domestic manufacturers will need to rely on exports to make up the difference.    Mild domestic demand by the consumer will also contribute to a mild recovery.   Consequently, job growth is not going to be swift. 

Source:  barrons.com

Source:  barrons.com

The Weaker Dollar

There has been much talk about the weaker dollar.    During the worst of the current recession, the dollar was actually strengthening.  This was not necessarily the result of confidence in the nation’s economy, but simply the high degree of risk aversion of global investors.  Investors were quite worried, and so investors flocked to the safe haven of U.S. Treasury securities.     Investors needed dollars in order to buy U.S. Treasuries, and consequently the dollar strengthened.  This flight to quality was also evident through plummeting Treasury yields.  There was a line of potential lenders outside the door of the U.S. Treasury, and this was reflected in these lower Treasury yields.

Today, we are seeing the dollar-weakening effects of a transaction called carry trade.  Carry trade is now placing downward pressure on the U.S. dollar.  So what is carry trade?  Basically, carry trade is when investors borrow in countries with low interest rates, and then invest those borrowed proceeds in other countries with higher yielding assets.    So for example, investors are borrowing in dollars (due to very low interest rates), go to the global market seeking higher yielding assets, and then must sell those dollars (thus weakening the dollar).   The proceeds are then invested in assets of emerging market economies, and this is the primary reason some economists are now pointing to asset bubbles in these economies.

Once the Federal Reserve begins to tighten monetary policy and increase interest rates (this will not happen in a while), and the dollar begins to strengthen in response to these higher interest rates, you will then see massive selling of assets in these emerging markets.  This selling will be necessary to repay dollar-denominated loans before the dollar strengthens further. 

New Claims for Unemployment

National unemployment claims continue a downward trend.  New claims released this week were basically flat from the previous week.    The 4-week moving average continued to decline, and continuing claims fell further.  However, new claims for unemployment will have to break the 500,000 barrier before we begin to see noticeable declines in the nation’s unemployment rate.   Even though new claims are down from earlier in the year, 500,000 weekly claims are quite significant.  Locally, we continue to see a downward trend in new and continuing claims, and this helps explain local declines in the unemployment rate.

Suggestions

If you have any suggestions on future columns or research about specific industries or other economic data, please send me an email at udufrene@ius.edu.

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This information is provided by

Uric Dufrene. 

Uric Dufrene, Ph.D. holds the Sanders Chair in Business in the School of Business at Indiana University Southeast.  He conducts research on local and regional economic trends, and teaches corporate finance at the undergraduate and graduate levels.   He previously served as dean of the School of Business.