Investors – The News is Not So Bad

The mood on Wall Street has been anything but spring-like. For the week, the S&P 500 and Dow Jones Industrials have dropped 1% and the Nasdaq Composite is down 1.3%. Today is the last trading day of the first quarter which will end relatively flat for the major indices. It was shaping up to be a pretty good one until investors got spooked The S&P 500 is up 0.3%, the Nasdaq is up 0.1%, while the Dow is down 0.9%. Thanks to diversification, our returns have fared better.

Economic news this week has been mixed. Most of the bad continues to center on the housing sector and for the most part seems to be contained there. Fed Chair Ben Bernanke and others have said that they expect the economy to grow moderately despite the troubles in housing and the sub-prime mortgage area.

Predicting the rate of growth of theUS economy seems to be more challenging than usual as the three estimates released over the past three months have varied considerably. The third and final estimate of fourth quarter GDP was set at 2.5% yesterday. The first and second estimates were 3.5% and 2.2% respectively. The report also showed that an inflation measure closely watched by the Fed rose 1.8%, less than expected and considerably less than the 2.2% in the third quarter.

Today’s reports of personal income and spending were also better than expected as the consumer continues to make money and spend it. Personal income increased at a seasonally adjusted rate of 0.6%, after climbing an unrevised 1.0% in January, according to the Commerce Department. Personal consumption, or spending, grew 0.6%, after a 0.5% rise in January.

The National Association of Purchasing Management said tha tU.S. business activity unexpectedly expanded this month to the highest level since April 2005, signaling the economy may be gaining momentum heading into the second quarter. Its index rose to 61.7 in March from 47.9 the prior month.Readings greater than 50 signal expansion. Reports earlier in the week showed that businesses were showing reluctance to invest capital until inventories were cleared out. Today’s reports indicated that business is indeed picking up.

Construction spending is also on the rise, according to the government. The 0.3% rise during the month was the biggest since March of last year according to Bloomberg and it follows a revised 0.5% drop in February. While homebuilding continues to decline, construction of factories, commercial, and government buildings is on the rise and providing a buffer for the economy.

Housing reports have been dismal over the past few weeks with few actual signs of abating. Lennar Corp. Chief Executive Stuart Miller said “The housing market continues to demonstrate overall weakness. While some markets are performing better than others, the typically stronger spring selling season has not yet materialized. These soft market conditions have been exacerbated by the well-publicized problems in the sub-prime lending market.” According to the Commerce Department the supply of new homes left unsold at the end of February was 8.1 months, the most in 16 years New home sales fell to the lowest level since August of 2000.

While Bernanke has said that he believes the economy will weather the housing slump, he does recognize the severity of the problem short-term. In his March 28 in testimony before Congress’s Joint Economic Committee he said “the near-term prospects for the housing market remain uncertain. Even if the demand for housing falls no further, weakness in residential construction is likely to remain a drag on economic growth for a time as homebuilders try to reduce their inventories of unsold homes to more normal levels.”

On a note of interest regarding this country’s push into alternative fuels, reports today show that U.S. farmers will sow the most acres of corn since World War II and cut soybean plantings after record ethanol production boosted grain prices to a 10-year high. Corn acres will rise 15% from last year to 90.454 million, the most since 1944. Farmers are shifting acres to corn to take advantage of a 74% jump in futures over the past year, causing meat producers to raise prices.

And finally; the looming specter of taxes. Democrats with their new majorities in both houses seem to be in such a hurry to reverse every single Bush policy, regardless of its effectiveness. The House narrowly passed a budget bill last night that would allow the Bush tax cuts to expire. IPI Senior Research Fellow Peter Ferrara said that the “George Bush’s tax cuts stopped the downward spiral in the economy that was starting in 2001. The 2003 tax cuts on dividends and capital gains were one of the most successful experiments in tax policy inU.S.history, causing a boom in capital investment that has greatly spurred economic growth, created millions of new jobs, and increased wages.If these tax cuts are now reversed, their enormously positive economic effects will be as well. Economic growth will decline, jobs will be lost, and wages will fall.

They will argue that the budget deficit requires higher taxes. Nothing could be further from the truth. Greg Vallerie, Schwab’s expert onWashington policy matters notes that “it now appears that the U.S. budget deficit is in such free-fall that we could be close to a surplus by next year, fiscal ’08. If anything, U.S. fiscal policies are about the most solid of any country in the world. Our budget deficit this year will be well below 1% of GDP. Only the UK and Canada are even close to that level. Most Western European countries are at 3 or 4 percent of GDP.Japan is at 5% of GDP. So I think that our fiscal policies are actually quite sound compared to most other countries.” We hope the Senate will quash this partisan and ill-advised trend.