2010 Second Quarter Economic Summary Prepared July 19, 2010 (07/26/2010)

According to the Institute for Supply Management™ (“ISM”), the overall economy expanded in June for the fourteenth consecutive month. Manufacturing activity grew for the eleventh consecutive month and the non-manufacturing sector expanded for the sixth consecutive month. The pace of growth slowed during June, more so in the manufacturing sector. The Greek sparked debt crisis and decline of confidence in the Euro currency has created fear of an economic relapse. Real Gross Domestic Product increased at an annual rate of 2.7% in the first quarter of 2010, having risen at a 5.6% rate in the fourth quarter of 2009. Nonfarm business sector labor productivity increased at a 2.8% annual rate during the first quarter.

Inflation remains subdued. The unadjusted Consumer Price Index rose 1.1% over the twelve-month period ending with June, and 0.9% on a core basis that excludes food and energy. The seasonally adjusted Consumer Price Indices were slightly negative for each month of the quarter due to lower energy prices.

The unemployment rate edged down from 9.7% in March to 9.5% in June as workers left the labor force. Nonfarm payrolls (seasonally adjusted) rose 313,000 in April and 433,000 in May, but dropped 125,000 in June. The June decline reflected a 225,000 decrease in the number of temporary Census 2010 workers. Private payrolls (seasonally adjusted) rose 241,000 in April, 33,000 in May and 83,000 in June. So far this year, private-sector employment has increased by 593,000 jobs.

Consumer confidence is a mixed bag. It improved slightly during the quarter according to the Thomson Reuters University of Michigan Surveys of Consumers (June 25, 2010), but The Conference Board’s survey (June 29, 2010) showed a sharp decline in June attributed to the slowdown in job growth.

Pending home sales fell in May, as expected, following the April 30, 2010 home buyer tax credit contract deadline according to the National Association of Realtors®. Retail sales for June were surprisingly decent given the circumstances.

The Federal Reserve Board noted in its June statement that while the economic recovery was still proceeding and the labor market gradually improving, financial conditions had become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending continued to contract. Business spending on equipment and software had risen significantly but investment in nonresidential structures continued to be weak and employers were reluctant to add to payrolls. The Fed left interest rates unchanged during the quarter.

Two steps forward, one step back. The European economic crisis had a major negative impact on the pace of the U.S. economic recovery. The carnage to equity markets has had a detrimental effect on personal wealth, confidence and willingness to make discretionary expenditures. This weight was added to an economy with a depressed housing market and exacerbated unemployment, with little prospect of additional stimulus. The major oil spill in the Gulf will have short term economic impacts, but its larger threat is to derail or make more expensive future energy costs. These financial concerns have eclipsed geopolitical risks, which are less stressful when oil is plentiful. That said, the U.S. banking system avoided catastrophe, we disagree with pundits who argue the Euro currency will collapse, and the securitization markets are no longer frozen. We anticipate the Fed will keep interest rates low for an extended period of time. The European crisis and related stock market swoon have reduced the strength and pace of the recovery. Bottom line, however, is that the economy continued to grow through June despite all that happened. We expect growth to continue albeit at a slow pace.

The second quarter plunge in the stock market assumes an overly pessimistic view of the economy, one unsupported by the facts. We have a favorable opinion of U.S. equity markets over the intermediate and long terms. Markets are too volatile to hazard a short run prediction.