The rear-view mirror shows the economy continued to expand in the third quarter.  US Gross Domestic Product increased to a 3.8% annual rate, more than predicted, despite higher energy prices, rising interest rates, and two devastating hurricanes.  Consumer purchases of automobiles and slower growth in imports contributed to the increase.  Housing was also a significant contributor, but it is slowing.  Residential fixed investment grew 8.9% in the third quarter, down from 10.9% in the previous quarter.  Federal government spending went up 7.7% in the third quarter, significantly higher than the 2.4% growth in each of the previous two quarters.  

If they were considering a pause in their relentless rate increases the Federal Reserve Governors missed a great opportunity to both assess the effectiveness of past increases as well as to show a little social empathy.  They called Hurricane Katrina's economic disruption only temporary and made no mention of the potential economic cost of Hurricane Rita as it raced toward the heart of the nation’s oil, gas, and gasoline production facilities.  Instead of pausing they raised the federal funds rate by a quarter percentage point to 3.75%.  The increase marked the 11th time since June 2004 and the longest sustained tightening campaign since 1977-79, when the Fed was fighting runaway inflation.

Inflation talk is picking up as Fed governors and economists speak these days.  This week, the Labor Department trimmed its estimate for non-farm business productivity growth in the second quarter to a 1.8% annual rate from 2.2%.  That’s down from a 3.2% pace in the first quarter.  The Labor Department also said labor costs rose more sharply in the second quarter than it first estimated, and that labor costs rose in the year ending in June at the fastest pace in five years.  Labor costs are the biggest generator of consumer inflation. 

Our prayers are with those who suffer on the Gulf coast from the destruction of Hurricane Katrina and those who are there to help them.  While there is significant coverage of the sensational events stemming from the darker side of human nature, the larger and more important story is of the suffering of thousands who have lost everything and of the efforts of thousands more who are there to help them.  Once again, we have an opportunity as to people to come together to help our fellow citizens and be an example to the world.  Perhaps the greatest challenge so far has come from the Reverend Franklin Graham as he calls on churches throughout the country to invite some of those homeless into their homes and to help them get them back on their feet. 

The week was all about oil – again.  Prices rose as Tropical Storm Katrina threatened oil production in theGulf of Mexico.  On Wednesday the price of a barrel of crude rose to $67.32, a new record.  Today as Katrina heads into the Gulf, it trades at $67.55.  Global demand for oil is now so high that any previously inconsequential disruption can threaten the supply of the irreplaceable energy source, at least in the fears of traders.

On most every front, housing, manufacturing, jobs, consumer demand, jobs, and corporate profits, the economy looks strong.  Growth should be sustainable for the foreseeable future, as long as the Fed doesn’t go too far with their rate increases.  Unfortunately, recent inflation data is not sufficiently benign to suggest the Fed may slow their pace any time soon.  On the positive side though, oil prices which topped $67.00 last Friday may have peaked. 

Based on comments from the Federal Reserve earlier this week and their actions in the previous weeks, it appears rates are headed considerably higher.  They say they believe higher short term rates and the possibility of an inverted yield curve will not create a recession.  We and other investors are not so sure.  While much remains to be seen in the coming months, we see little to move the broad markets ahead.  But if the broad markets will be sideways to down there remain some select opportunities that still look promising.  In light of a weakening economy we have taken and will continue to take some profits among our more economically sensitive issues. 

Tremendous growth in productivity of the last few years continues to strengthen our economy.  The latest evidence comes as the government reports that employers paid the biggest wage increases in a year, rising .4% last month, twice economists’ expectations.  Employers also created more jobs as payrolls grew by 207,000 last month, the biggest increase in three months.  Still, theU.S.unemployment rate held steady at 5% as more workers entered the labor force in search of jobs.  The civilian labor force increased by 450,000 in July, the Labor Department said. Of those, 438,000 found jobs.

The U.S. Economy continues to grow steadily.  The Commerce Department reported today that the economy grew at a rate of 3.4% during the second quarter.  It was the ninth straight quarter of growth exceeding 3%.  We have to go all the way back to 1983 to find a longer growth streak over 3% and it lasted for 13 quarters, ending in March of 1986.