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Some News is Good
Subject Unemployment
Topic Economic Policy
Key Words Recession, Interest Rates, Producer Price Index, Unemployment
News Story

With analysts uncertain as to the future direction of the economy, the latest data on wholesale prices and new claims for unemployment insurance provided some hopeful signs of a continued recovery. Wholesale prices dropped 0.2 percent in July following a 0.1 percent increase in June. New claims for unemployment insurance fell, suggesting that job layoffs had stabilized. Retail sales for the month of July, however, were lackluster.

Wholesale prices, as reflected by the Producer Price Index, are an indicator of the future course of retail prices. Prices for automobiles, trucks, fruits, chicken, communication equipment and computers all fell in July, more than offsetting the increase in gasoline prices. With no current evidence of inflation and no indication of future increases in prices, the Federal Reserve has more freedom to keep interest rates at their present level or even provide for a decrease.

New claims for unemployment compensation fell last week by 15,000, after seasonal adjustment to 376,000. Of additional significance is the fact that the four-week moving average was below 400,000 for the eighth straight week. The 400,000 level is considered to be a sign of weakness in the labor market. Even if the rate of layoffs has slowed, new hires will only take place when employers are confident that the economy is recovering and demand is likely to increase.

After recording rapid economic growth of 5.5 percent in the first quarter of this year, the economy slowed to just 1.1 percent growth in the second quarter. With economic data indicating weakness in some sectors of the economy, many economists have lowered their forecasts of economic growth in the third and fourth quarters. Others have stated that chances of a double-dip recession have increased. Accordingly, many believe that the Fed should cut interest rates.

(Updated September 1, 2002)

Questions
1. What is the Producer Price Index? What does it measure? How is it calculated?
2.

The article refers to "seasonally adjusted" data. What is seasonal adjustment? Why would the government wish to seasonally adjust some of its data series?

3.

Why are some economists calling for interest rate cuts? Why might the Fed be reluctant to accommodate these wishes?

Source Jeannine Aversa, "Economy gets good news on jobs, costs," USA Today, August 9, 2002.

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