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The asset category leader for the fourth quarter so far, aside from Internet stocks, is gold.  The metal is up almost 13%, quarter to date.  Traditionally a move like this signaled bad news – too much liquidity leading to inflation, or falling currencies, or recession.  But, not this time.  Inflation remains tame, the dollar is actually rising with gold, and the economy continues strong. 

The economy continues to expand, in spite of hurricanes, high energy costs, and Fed Funds rate increases.  The weeks’s crowded raft of economic reports was kicked off by housing.  The reports were mixed, but generally point to a slight cooling.  The National Association of Realtors reported Monday that sales of existing homes fell 2.7% in October to a seasonally adjusted annual rate of 7.09 million.  Houses stay on the market longer as the inventory of homes on the market rose to a 4.9 months' supply in October, from September's 4.6 months' supply.  Meanwhile, housing affordability dropped as the median sales price rose 16.6% on an annual basis to $218,000.  That was the biggest jump in 26 years. 

There’s a great deal of talk these days about a lack of trends and market leadership.  Most recently, homebuilding and real estate have driven the market, along with energy.  With interest rates rising and energy prices declining, the likelihood of these industries continuing their out-performance near-term is doubtful.  Additional leadership has come from investment banks and brokers as their earnings have increased on the rise of mergers and acquisitions.  But this activity is a bi-product of excessive capital and compelling market values.  Better allocation of capital and increased productivity will improve profits to a degree, but it will not significantly drive GDP.  Where’s the next big wave of real growth coming from?

November 11, is the anniversary of the Armistice which was signed in theForest of Compiegne, in Île-de-France by the Allies and the Germans in 1918, ending the four-year conflict of World War I.  The War officially ended on June 28, 1919, with the signing of the Treaty of Versailles, but the actual fighting between the Allies and the Germans ended seven months earlier with an armistice, which went into effect on the eleventh hour of the eleventh day of the eleventh month in 1918.  In November of 1919, President Woodrow Wilson issued his Armistice Day proclamation. 

Indications are that a slowdown is in the cards for this quarter and for the first quarter of next year, but that does not mean recession must follow, as some more pessimistic economists suggest.  Indeed there are many reasons to expect a significant pickup.  Productivity, the driver of this powerful economy remains alive and well.  Productivity not only keeps our economy growing without inflation, it is vital for the U.S.to remain competitive in an increasingly competitive global economy.  Yesterday, the government reported that Non-farm Productivity was up a whopping 4.1% for the third quarter and well ahead of last quarter’s 2.1%.  The increase more than offset the 3.6% increase in hourly compensation, so unit labor costs fell 0.5% during the quarter.  

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.