Current Statistics (8-04-2003)

Unemployment Rate

The recent report from the Bureau of Labor Statistics showed the unemployment rising to 6.2% of the labor force. Yet GDP growth has continued at a positive rate 2.4% (2nd qtr 2003 – annualized rate). What has occurred is a phenomenon called the ENCOURAGED WORKER EFFECT. In a traditional business cycle, after the recession has set in, some workers eventually stop looking for work and are removed from the unemployment statistics. This mutes to some extent the severity of a recession when looking at employment statistics. After the recovery begins those formerly discouraged workers begin to search for employment as they are encouraged by positive signs in the economy. Now they are back in the labor force and until they find a jobs are once again classified as unemployed. This ENCOURAGED WORKER EFFECT mutes, to some degree, the strength of the recovery as indicated by employment statistics. A second reason for the rising unemployment rate is the continuing restructuring of firms and new structurally unemployed workers as a result. As the economy becomes increasingly competitive, dismal profits cannot be improved by raising price; rather, it takes concerted efforts to lower costs. This is the lesson implied in the New Paradigm in economics. This has also resulted in deflationary pressures replacing a long standing inflationary bias in the American economy.

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The Changing Meaning and Significance of Unemployment

Jobless Claims

In the recent report released by The Department of Labor, the number of new jobless claims fell from a forecasted 415,000 to 386,000 in the week of July 26, 2003 (This is the second straight week that the jobless claims have fallen below 400,000 – the numbers had been more than 400,000 for the twenty-two previous weeks). Given the large amount of structurally unemployed workers, this is heartening news. Unless the structurally unemployed workers are re-employed/redeployed, the productivity dividend for society as a whole is aborted. While it has the positive the affect of lowering unit costs to the firm restructuring, the potential increase in goods and services (sales) from such changes will not be realized until these workers are reemployed.

Leading Indicators

The most recent report indicated a one tenth of one percent increase in the leading indicators. While not exciting, it does indicate the recovery that began in the fourth quarter of 2001 is continuing at a reasonable and consistent pace. Again, a stronger recovery is needed to re-employ the large number of structurally unemployed dominating the ranks of the jobless.

New Housing Starts

The most recent data shows near record levels of new housing starts. They rose 3.7% since the last report. This amounts to an annualized rate of 1.6 million units. This sector has continued strong through the current expansion but through much of the last mild recession in 2001. This is one area where low interest rates have helped buoy household spending.

Durable Goods

The most recent report from the Commerce Department shows a 2.1 % increase in long-lasting durable goods and 3.9 % in durable goods orders in the Transportation sector. Tax cuts on such business spending appear to be having the expected effect. Relatively low levels of such business spending in the recent past (significant drops in fact) argue for this as another reason for the continued expansion of the economy.

Second Quarter, 2003 Real GDP

The second quarter of 2003 showed a continued positive growth in real GDP – The Commerce Dept reported a 2.4% growth rate for the 2nd Quarter 2003 (on an annualized basis). It marked the 7 consecutive quarter of economic expansion, allying fears of a double dip recession. At this rate, indicators argue for the 3rd Quarter of 2003 to confirm continued economic expansion. To reduce unemployment, most of which is structural, an even high rate of expansion will be needed. The third quarter figures will be released at the end of July.

Price Indices

There are two types of indices that attempt to measure inflation…

One type uses a fixed basket of goods (and services, in the case of the Consumer Price Index). A representative basket of goods and services is selected for the base year whose market value is pre-determined. That market price of the same basket is measured in successive periods and the difference is related to the base period. A percentage change is calculated. It is usually seasonally adjusted and annualized. This type of index ignores the substitution effect and is quality blind. The Consumer Price Index, or CPI, and the Producer Price Index, or PPI, are of this type. Some attempts have been made to adjust for quality changes, but such adjustments are widely criticized. In an effort to capture the substitution effect, chain link indices have been developed. There is still a residual error of overstatement of inflation. This problem arises because buyers will substitute goods whose prices have risen less than have the substitutes in the basket.

The other type of basket, the GDP Implicit Price Deflator, is one that changes with buyers changes in spending patterns. Theoretically, the price changes are determined by retroactively pricing the current more relevant basket which reflects changing buyer preferences. It is interesting to note that according to Implicit Price Deflator numbers, there was NO RECESSION in 2001!

Bureau of Economic Analysis
Table 8.1. Percent Change From Preceding Period in Selected Series
[Percent]   Seasonally adjusted at annual rates
Today is: 7/24/03   Last Revised on June 26, 2003   Next Release Date July 31, 2003
		2000	2000	2000	2000	2001	2001	2001	2001	2002	2002	2002	2002	2003
		I	II	III	IV	I	II	III	IV	I	II	III	IV	I
	Gross domestic product:
	Current dollars	5.7	7.3	2.2	3.2	3	0.9	1.9	2.2	6.5	2.5	5.1	3.2	3.8
	Chain-type quantity index	2.6	4.8	0.6	1.1	-0.6	-1.6	-0.3	2.7	5	1.3	4	1.4	1.4
	Chain-type price index	3.1	2.3	1.6	2.1	3.7	2.5	2.2	-0.5	1.3	1.2	1	1.8	2.4
	Implicit price deflator	3.1	2.3	1.6	2.1	3.7	2.5	2.2	-0.5	1.3	1.2	1	1.8	2.4

10-year U.S. Government Bond Rate

While falling to nearly 3% a short time ago, this interest rate risen rapidly to nearly 4.5% before falling back to 4.28% on August 4, 2003.

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Interest Rates

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