Katrina Felt, But Economy Still Strong

The fans and dehumidifiers are gone and the office is dry, quiet, and empty.  We hope to have the walls and trim and paint restored this weekend, with our furniture soon to follow.  We are very thankful for the quick response of the building management and their contractors.  We are also delighted that our network has continued to run throughout the event without skipping a beat.  In the midst of the ruckus we installed our new website.  Please take a look – www.beaconinvest.com.

TheU.S.government announced that the economy grew considerably slower than expected in the fourth quarter as Katrina finally effected some drag on the economy.  The 1.1% increase in GDP was well below the 2.8% economists were expecting and follows the third quarter’s huge spurt of 4.1%.  The slowdown snapped 10 straight quarters of growth exceeding 3%. That was the longest such string since the 13 quarters that ended in March 1986, according to Bloomberg.

Consumers reduced their spending to the slowest rate since 2001 and businesses slowed their investment to 2003 levels of growth as energy prices remained stubbornly high.  The GDP Price Index rose more than expected though, pointing to a better first quarter.  Experts are largely looking for the first quarter to resume economic expansion in the 3.5% to 4% range.  The University of Michigan Confidence Survey, released earlier in the week, showed continued improvement in consumer confidence in January exceeding its average of the past five years.

Business momentum has been very strong of late, but took a breather in the fourth quarter.  Durable Goods orders were slightly better than expected and inventories remain very lean.  The reduction in companies’ inventories added 1.45 percentage points to GDP.  Business fixed investment, which includes spending on commercial construction as well as equipment and software, rose at a 2.8% annual rate in the fourth quarter, after rising at an 8.5% rate from July through September.  Spending on new equipment and software rose 3.5%, the smallest increase since the first quarter of 2003, and down from an 11% rate in the third quarter.  However, a Commerce Department report yesterday suggested improved business spending will drive economic growth early this year.  Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, rose in December by the most in four months.

The economic expansion is happening around the globe.  Our favorite investment strategist, Don Hays points out that theUSconsumer is about to get a break from his and her efforts in sustaining the global economy.  In his latest publication Don points out that only 5% of China’s population is in the middle income bracket or higher.  That relates to 65 million people, compared to theU.S.’s total working population of 180 million people.  Don says that today’s projections call for more than 45% of China’s population to be in the middle income bracket by 2020.  He thinks the projection is too high, but points out that if it is only 25%,China will add $325 million new middle-income consumers.  In just the last three months we have seen China’s imports grow 23%, outpacing their export rate of 21%.  Consider the same phenomenon is occurring in virtually every other emerging economy and the magnitude of what is happening begins to crystallize.  Don claims that this global expansion will not be American-led as in every recovery since the world wars; it will be unilateral.

Inflation continues to simmer, but it doesn’t look like it will become a problem.  The government’s personal consumption expenditures index, a measure of prices tied to consumer spending, rose 2.6% after a 3.7% rise in the third quarter.  The index excluding food and energy, a measure favored by Fed policy makers, rose at a 2.2% annual rate.  The Fed meets next on Jan. 31st.  All 39 economists in a Bloomberg survey forecast a quarter-point increase in their benchmark lending rate, to 4.5%.

What the Fed does and says will have great impact on the stock market these next couple of months.  Oil prices will also weigh in as Iran, Nigeria, Iraq, Venezuela, and the weather have their say.  We may indeed see a spike into the 80’s and 90’s, but so far, the economy has withstood the rapid rise and sustained highs in energy costs.  The other question mark is housing, but it has not collapsed nor does it show signs of collapse as some feared.  New home sales, released today, came in stronger than expected.  Overall, growth in housing is slowing, but the slowing is gradual, which lessens the negative impact on the economy.

The Fed speaks next Tuesday and we’ll be listening.

Sam Bass
[email protected].com