10 Dec 2004 Recovery Remains Bumpy
The government’s report that the growth in non-farm productivity dropped from 4.0% to 1.8% caused investor concern as the S&P fell 1.2% this week. It was feared by some feared that the productivity miracle of the 90’s might be coming to an end. We believe many of the drivers of productivity remain in place and that improvements will continue, albeit at a slower pace.
Productivity is a vital aspect of a growing economy as it improves both corporate profits and the standard of living. As companies are able to deliver more services or manufacture more goods with an unchanged investment in capital and labor, their profits improve. Those increased profits, free from inflationary forces serve to raise the standard of living for the entire economy. When productivity declines, so do its positive benefits.
On the other hand, if the economy continues to grow, as does this one, it likely means that companies have stretched their capital and labor to the limits of their producing capacity and will need to employ more of both to meet their demand. Economists widely expect the economy to add more jobs as we go forward. But the trend defies predictability. This week the government reported that U.S. workers filing unemployment claims unexpectedly rose by 8,000 last week. Industries such as consumer products and utilities are trimming their workforces as they consolidate and are able to operate more efficiently. But economists still expect the productivity-driven new hires to dwarf the number of layoffs in the coming months.
Oil prices continue to sway investors. The equity markets have traded inversely with oil prices all year. The recent abrupt declines prompted excellent stock returns. Oil has risen 3.7% from its recent low of 41.43 on December 7th on news that OPEC planned to cut production to stem the drop in prices. The stock market rally of the past several weeks stalled this week largely due to oil.
Consumer Confidence, which has been linked to gasoline and heating oil prices, but probably more to jobs, rose for a second month. The U.S. economy has added 2.2 million jobs since August 2003. Economists now believe that this will be a holiday spending season for retailers. Bloomberg reports that mortgage foreclosures are at a four-year low in the third quarter as the recovering economy makes it easier for people to make their payments.
Next Tuesday the Federal Reserve will meet again to consider whether to raise its benchmark rate from 2.0% to 2.25%. According to a Bloomberg survey, 62 of 85 economists believe they will. But recent data suggesting a slowing in recovery trends may give them pause. But more importantly is what they will say about their future moves. A recent Fed study has shown that the words Fed governors use to describe their policy and outlook account for more that three fourths of the explainable variations in five and ten-year treasury prices. The market is more interested in what the Fed says it may do hence than what it actually does. Borrowing the study’s title, sometimes words do indeed speak louder than actions. We will pay close attention next week to what the Fed says about their expectations for this economy. These indications combined with government fiscal policy news from President Bush and the Congress on major issues in the coming months will continue influence our investment opinions and selections.