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Just a couple of weeks ago it looked as if the economy was going to re-accelerate after only modestly slowing to a respectable 2.5% growth in the fourth quarter. But more economists are now reducing their estimates for growth and saying that fourth quarter GDP will likely be revised downward from 2.5% to 2.0%. In several speeches, Fed governors and district-bank presidents yesterday pared their estimate of economic growth for 2007 to 2.5% - 3%.

Bond and stock investors alike are struggling to find some broad theme on which they can base their investment propositions. A problem is getting too close to the data, which, according to Fed Chair Ben Bernanke is ‘noisy.’ In his testimony before Congress Wednesday and Thursday Mr. Bernanke issued a balanced assessment of the economy with moderate growth and easing inflation. He said that he sees stabilization in the housing sector, and pointed to increasing strength in manufacturing and consumer spending.

The strength of the U.S. economy continues to confound skeptics as well as optimists. The government released it’s first of three estimates on the overall growth of the economy on Wednesday. Even in the face of slumping housing gross domestic product climbed at a seasonally adjusted 3.5% annual rate in the fourth quarter, up from 2% in the third quarter. And even more noteworthy, it grew without inflation. The price index for personal-consumption expenditures posted its biggest drop in 52 years falling .8%. 

Investors have gradually moved away from the notion that the Fed is ready to cut interest rates while some think they may be near raising them. The economy has slowed, but will it continue to slow sufficiently to squeeze out inflation? Sure housing and autos are in the basement. Just yesterday, the National Association of Realtors reported that sales of existing homes in 2006 dropped 8.4%, the biggest droop in about a quarter century according to the WSJ. Also yesterday, Ford reported a staggering net loss of $5.8 billion during the fourth quarter, dragging its shortfall for all of 2006 to $12.7 billion.  General Motors said it would delay filing its fourth quarter and 2006 earnings results as it "will restate its financial statements, primarily due to pre-2002 tax accounting adjustments," according to its statement also in the WSJ.

In last week’s Brief we asked the question was it time for technology to shine? The answer so far is a resounding ‘not yet,’ as bellwethers IBM, Motorola, Apple, and Intel all disappointed investors with their fourth quarter results in the last few days. The run-up in technology stock prices in the first weeks of January is proving to be premature. Investors who bid the shares up just weeks ago on the notion that 2007 earnings for tech were going to be well ahead of other sectors’ growth having changed their tune as early reports are less than their high expectations. They are now nervous about commoditization and competitive pressures combined with a slowing economy.

It’s been seven full years since the huge Y2K push by the world’s corporations and governments to modernize their technology platforms. You will recall that the impetus came from the nearly universal use of a date space-saving technique which used only two digits to store the year rather than four. It was feared that when the world’s computer clocks arrived at 01/01/2000 mass chaos could follow. How would computers distinguish between 1900 and 2000 when all they saw was 00? Suffice it to say that virtually everyone who used computers in their business felt compelled to upgrade both computers and software creating a huge boost for everybody in technology.

Economic reports continue to indicate that theUSeconomy and the global economy are headed for a soft landing rather than a recession, despite the decline in housing and the auto sectors. Today, the Labor Department announced that theU.S.added a greater-than-expected 167,000 workers to employers’ payrolls in December while incomes grew by the most in eight months. The employment gain followed a 154,000 rise in November, also larger than previously estimated and the overall unemployment rate held at 4.5%. On Wednesday, the Institute for Supply Management helped lift stocks by reporting that its barometer of manufacturing business crept up to 51.4 in December, indicating growth after a brief contraction in November.

The Fed met earlier this week and announced that they plan to keep the brakes on the economy as they fear inflation worse than they do a slowing economy. But there was room in their statement for hope that a cut would come in 2007 noting a “mixed” economic performance and describing the year-long housing slump as “substantial.”

The government revised its estimate of how fast theUSeconomy grew in the third quarter from 1.6% to 2.2%. Stocks did very well mid week as investors were cheered by faster growth in the economy which drives corporate profits higher. Bonds on the other hand slid on the news as stronger economies can mean higher inflation. 

The polls tell us that the Republicans lost the election over the Iraqi War and scandals. But, scandals are a part of the political fabric and largely accepted. It’s obvious that the Bush’s administration’s handling of the war is the major reason for the Republicans’ historic defeat. Even at the outset, the war was fraught with political risk. The world was not behind it nor was a significant minority (at that time) of the country. Wars are never as quick or efficient as hoped. In time and with daily reports of increasing chaos, support at home quickly diminished. The no-war minority grew more vocal, and with the help of opportunistic politicians and an Administration deaf to outside voices, an unstoppable groundswell began.