2009 Fourth Quarter Economic Summary (02/18/2010)

Economic statistics tentatively signaled the economy had turned the cusp towards a recovery. According to the Institute for Supply Management™, the overall economy grew during each month of the quarter. Their manufacturing sector PMI Index December figure of 55.9% was the highest reading since a 56% number in April of 2006. Their non-manufacturing sector NMI Index registered a tepid 50.1% in December after a small slip in November. Real gross domestic product rose at a 2.2% annualized rate in the third quarter compared to a 0.7% decrease in the second quarter.

The TED Spread, one measure of the shakiness of the banking sector, continued to trade in a range equivalent to pre-meltdown normal levels. Our bottom-up company based quantitative modeling, on balance, reflects a significantly better outlook for company earnings trends than during the depths of the financial collapse.

The economy continued to shed jobs during the quarter as a whole with hopes arising from a 4,000 job gain in November dashed by an 85,000 job loss in December. One positive factor is a 46,500 net increase in temporary help jobs in December. These can be a leading indicator of employment growth since employers may hire temporary workers before committing to permanent employees. The seasonally adjusted unemployment rate rose to 10.2% in October then dropped to 10.0% in November and finished the quarter there.

The Federal Reserve Board left rates unchanged. The Fed continued to note weakness in the economy, and stated that inflation will remain subdued for some time. In their December statement, the Fed also noticed that economic activity has continued to increase, the housing sector has shown some signs of improvement and that the deterioration of the labor market is abating. While the Fed believes that economic activity will continue to be weak, it anticipates Fed policies and market forces will strengthen economic growth gradually.

The Conference Board’s Consumer Confidence Index rose during the quarter while the University of Michigan Surveys of Consumers Sentiment Index declined very slightly. Both statistics finished the quarter dramatically improved from the prior December.

The personal housing market continued to improve. According to the Federal Housing Finance Agency’s Home Price Index, U.S. home prices increased 0.6% on a seasonally adjusted basis from September through October though they fell 1.9% for the twelve-month period ending with October. The National Association of Realtors® reported that sales of existing homes increased to 6.54 million units in November, a 7.4% seasonally adjusted increase from October. This represents an increase of 44.1% over home sales in November 2008. Current sales were at the highest since February 2007 when 6.55 million units sold.

This second dip recession appears to be over. The economy is slowly improving, following the leadership of the industrial sector rather than consumer spending. Employment has yet to increase, but that is not surprising as it is often a lagging indicator for economic growth. Banks remain stingy and securitized commercial real estate financing continues to be difficult. Wall Street and the money center banks are unreformed and unrepentant. Our opinion of the equities market remains cautiously optimistic.