 |
Integrity
Performance Service
|
|
|
|
|
|
|||||||||
|
|
||||||||
|
Growth in the year ended September 30, 2002, was a respectable 3%. This growth was due entirely to the consumer, who benefited from a virtuous circle of low inflation, low interest rates, and rising real incomes. A record amount of mortgage refinancing augmented consumer incomes, and remains a significant force as 2002 draws to a close. There is, however, a dark side to this otherwise sanguine view. An anemic level of business capital spending, inconsistent manufacturing trends, and poor economies in virtually all other industrialized nations muddles the generally positive picture. While evidence suggests the consumer remains healthy and continues to spend, orders for capital goods are essentially trend less. Also, comments from corporate executives are gloomy, and add to pervasive concerns about business spending. Despite the disappointment in the level of business spending there are tantalizing signs that the economy will continue to grow and that a better balance between industrial and consumer spending will emerge. Corporate profits rose 2.1% in the third quarter and the widespread effort by corporations to improve balance sheets has resulted in a strong increase in corporate cash flow. With the steady improvement in balance sheets the ability to increase spending has been restored. Early indications appear to support the opinion that business spending is in the initial stages of a rebound. Expenditures on computers and equipment rose over 6% in the last quarter. If spending by distressed industries is excluded, such as airlines and telecommunications, business spending appears to be broadly on a more positive track. The outlook for manufacturing is still clouded with uncertainty, however. After a promising spurt in the third quarter, the improvement stalled in the final months of the year. The reduction in the Federal Funds rate to 1.25% in November will help by improving confidence, but clearly more time is needed for sustainable growth to be set in motion. Several recent surveys of manufacturers indicate that a majority of participants feel the worst part of the manufacturing decline is past, even as the competitive situation remains difficult. There are other reasons to be more upbeat about economic prospects in 2003. Leading economic indicators have remained positive for the past two months, after having been down the previous four months. Initial unemployment claims are no longer rising, and companies are not cutting back on their capital spending plans as they had been doing. In the financial markets, the spread between the yield on corporate debt and Treasuries has narrowed, pointing to a turn away from the extreme level of risk aversion so evident in the third quarter. Consumer confidence has been rising in recent months and at last reading is higher than it has been since midyear. The stock market has also shown encouraging resilience in the fourth quarter, in the face of a barrage of negative commentary and international turmoil. After a painful year of scandal, cutbacks and disappointments, the financial condition of America corporations is healthy and gaining strength. We believe that the economic recovery of the United States will remain on track. The exceptional level of productivity advances point to higher levels of profitability going forward. Certainly there are issues that will remain worrisome. Overriding them however, are the economic and financial conditions which historically have always sparked a new growth phase, i.e. low interest rates, low inflation, and growth-enhancing fiscal and monetary policies. Investment Policy Committee Alfred A. Lagan, CFA, Chairman December 23, 2002 The opinions expressed herein are those of Congress Asset Management and are subject to change without notice. 2 Seaport Lane Boston, MA 02210 www.congressasset.com
|
|
|||||||||||||||
