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Integrity
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One cannot take the threat lightly. It is real, and preparedness and caution are proper responses to the condition. We do not pretend to know how long the threat will last, or in what way it will manifest itself. The experience of the Cold War, which threatened total annihilation of our society, lasted forty years. During that time, with interruptions caused by hot wars, recessions, assassinations, natural catastrophes, and other horrific events, the United States economy continued to grow and prosper. Once the threat came out of the shadows and could be viewed for what it was, it became measurable, and lost its "bottomless pit" quality. Ordinary people returned to doing ordinary things. Paralysis ended. The economic picture of the United States continues its slow recovery from recession. The housing market remains uniformly strong. Consumers continue to spend though at a more subdued pace than a couple of years ago. The more conservative spending habits are evident in a number of statistics. The Wall Street Journal reported that credit card debt declined sharply in December, and for the year rose just 1.6%, a sharp deceleration in the trend over the past five years. The savings rate has improved steadily and at year end stood at 4.3% of income. Moreover, the debt burden of the consumer, a loud tocsin to many economists, has receded from its record high level. This attention to the balance sheet by the consumer is a healthy development, and is laying the foundation for continued spending later. There is no evidence at all of a collapse in consumer spending. Other reports do not indicate any economic deterioration, and in some cases improving conditions are evident. There is a clear improvement in manufacturing. The authoritative Institute of Supply Management reported a surprising increase in manufacturing activity in December, and the improvement was maintained in January. The low level of inventories in the system is credited with the improved manufacturing outlook. Whether the improvement can be sustained going forward is dependent on the strength of final demand. Employment shows a mixed picture. The recent decline in unemployment to 5.7% is encouraging, but is attributable mainly to seasonal factors. Further declines in unemployment, especially manufacturing sector unemployment, will be needed to restore confidence. There are problem areas, as always. In these dark days they seem to be emphasized beyond their importance in the overall picture. Capital spending has yet to show sustained improvement. Automobile sales declined in January, and the increase in gasoline and heating oil prices imposes another tax on the consumer. Europe continues to struggle with Germany, its largest economy, particularly vulnerable. Certain other areas of the world are unstable at best, and the deficit is worrisome. It is not our intention to make light of these concerns, or to assume perfect resolutions to all of them. However, geopolitical and economic concerns are always present in our world and in our market. The current flight from equities is driven by other factors, mainly fears of terrorism and war. These are dark tunnels through which we are forced to walk. When they are exposed to the light they will not be as fearsome. In spite of them, the fundamental drivers of the United States economy are favorably poised for continued expansion. These include low levels of inflation, record low interest rate and inventory levels, record high levels of cash, world class gains in productivity, and a productive work force of over 131 million people motivated to work. America has faced challenges before, and has taken serious hits from those who would do us harm. The indomitable spirit of the American people, with its immigrant sense of striving, enduring optimism, courage in the face of danger, willingness to sacrifice to produce a better future for our families, provide the basis for optimism, not pessimism. We believe this mid-winter gloom will give way to a visible economic improvement and a very attractive stock market. Investment Policy Committee Alfred A. Lagan, CFA, Chairman February 14, 2003 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
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