04 Mar 2005 Business Coming In Like a Lion?
The economy continues to show signs of strength and expanding breadth. Consumer spending, which represents two thirds of our economy, has been the steady sustainer since recovery began in late 2001. Low interest rates and taxes have provided consumers with more spending power. Not until the second half of 2004 did the corporate sector join the party, but it is coming on strong. Most recently business investment has grown at the fastest pace since 1997. It will likely take a leadership position from here as the consumer shows signs of slowing somewhat.
The government announced today that U.S. employers hired an additional 262,000 workers in February suggesting improving confidence at companies and adding credence that business will sustain the recovery. Manufacturing jobs rose for the first time since August. The economy added 2.2 million jobs in 2004, the most since 1999.
A very positive sign is that the good economic news of today did not rattle the bond markets with inflation fears. The Lehman 7 to 10-year Treasury Index is up almost ½% on the news. The rise in jobs basically allows the Federal Reserve to continue with their plans to get interest rates to a neutral level so they are neither accommodative nor restrictive. The Fed will likely raise rates another quarter percent on the 22nd of this month to 2.75%. Economists believe they are headed to four or five percent, while we believe they will not need to go so far.
Some have worried that the slowing growth of the money supply is troubling. Indeed, the three-year average money supply growth rate has fallen below 5% which is a level we like to see. The better indicator of Fed’s intentions for economic policy, however, is the yield curve. As long as the difference between long-term and short-term interest rates falls between 1.2% and 1.5% the Fed is supportive of a growing economy. When the spread dips below 1.2% it is a signal that tight money will eventually squeeze the lifeblood (money supply) out of the economy. That is far from the case now as the spread is holding at 1.57%.
Market leadership continues to come from energy, natural resources, select technology, and communications companies. Japan, Australia, Austria, and South Korea turned in the best country performance this week. Our focus continues to be in energy, natural resources, communications, and international (specifically Asia). We also have added and expect to add a few attractively valued and fast growing healthcare companies in the coming months.