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Economic News, Data and Analysis

Is the US Economy Slowing?

While the economy
still appears to be in good shape, there is some evidence that the economy
is slowing down slightly.

Consider some
of the recent numbers…

Unemployment
rose from 4.0% to 4.1%.

Durable goods
orders fell 12.4% in July.

The Chicago Purchasing
Managers Index (PMI) fell to 49.5% from 51.8% – a value less than 50% indicates
contraction.

Jobless claims
have risen in each of the past 3 weeks.

Consumer confidence
fell from 143 to 141.1.

Construction spending
fell 1.6% in july – the largest decline since 1994 – following a 1.3% decline
the month below.

Factory orders
fell 7.5% in July (although June was very strong).

Index of leading
indicators dropped 0.1% in July.

While any one of
these indicators by itself does not mean much, they do in aggregate suggest
that the economy may be slowing just a bit.

Despite the declines,
the economy is still in extremely good condition. While the GDP
data
will not be released for a few weeks, it seems likely that the
pace of economic growth may be slower than the 5.3% rate that held in the
second quarter. We may be backing away from the highs, but we’re still
moving right along.

What’s the
cause?


Ok, so here’s
reason #547 as to why economics is hard. Here are two explanations as to
why the economy may be slowing:

1) The Federal
Reserve’s incremental increases
in interest rates which began late last year is beginning to have an
effect.

2) OPEC’s agreement
to cut production and raise oil prices is having an impact on the economy.
(See Oil
and the Economy
.)

How might we tell
the difference between the two possible causes? One way might be to try
to find episodes in the past when oil prices rose but interest rates did
not (and vice versa) and to see how much each factor individually affects
the economy independent of each other. But there’s still a problem – what
if higher oil prices cause inflation and cause the fed to raise interest
rates? In that case, it might not be possible to separate the independent
effects of interest rate hikes and oil prices.

If economics were
like other sciences, we could set up a controlled experiment where we would
hold everything constant and change just one thing (like interest rates)
and see what happened. Unfortunately, unless we want to take over a country
and subject its citizens to random fluctuations in the economy, that kind
of information is not obtainable. Instead, economists are forced to look
back on the past and use any statistical tool we can think of to try to
tease out the independent effects of various “shocks” to the economy –
not an easy task, believe me.

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Filed under: Recession

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