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Integrity
Performance Service
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Our reading of the domestic economy post Katrina and Rita indicates an intact and solid economic advance, with surprisingly little impairment from the storms. Aside from the human costs, the most serious damage was inflicted on oil drilling platforms, refineries, and pipelines. Most are now back in full operation. With their return to service, the spike in energy prices has subsided. Nor has the steady rise in interest rates by the Fed as yet caused any economic distress. Real (i.e. excluding inflation) Gross Domestic Product for the third quarter was reported preliminarily at 3.8%, faster then expectations and faster than the 3.3% second quarter result. This accelerating momentum will carry over to the fourth quarter and into 2006. This steady growth can be attributed to a complex but smoothly functioning, multifaceted economic machine whose many moving parts are subject to different influences and operate independently. As a result, some accelerate while others are throttling back. In the current environment, business investment, industrial production, and exports are rising even as some important areas, such as housing, are slowly reining in. Consumption is generally holding up well, buoyed by increasing employment and rising wages. Disposable personal income has grown steadily over the past year. The net result is a broad and solid economic advance, with virtually full employment. The transitional forces at work are symptomatic of our dynamic economic system which is underpinned by a culture and national policies that favor individual incentives over government planning, a culture sadly lacking in many countries. The current state of the United States economy belies the dour projections of many observers. The inflation spurt this year is a problem and a legitimate concern. In our judgment, it is not a permanent fixture of the economic landscape. The spike in 2005 energy costs appears increasingly to have been a unique event. Inflation will subside gradually as 2006 progresses and energy costs decline, as seems likely. It is still difficult to push through price increases at the retail and at many wholesale levels, as international price competition remains intense. Productivity trends in the United States remain healthy, bolstering a sanguine view toward longer term inflation prospects. Undoubtedly, interest rates will rise further as the Federal Reserve pursues its policy of gradual increases in the Federal Funds rate. However, at the 4% level, we are substantially closer to neutral than one year ago, and each increase further reduces that uncertainty. The Fed’s singular focus on containing inflation is the right policy at this time and, we believe, will ultimately prove to be beneficial. The extraordinary number of shocks that have converged to cause much confusion in 2005 are behind, and their lingering influences will wane rapidly. Next year will bring its own challenges and worries but they will not be the same ones as this year. The attractive conditions which propelled the U.S. economy over the past two years are intact. Often overlooked in our fixation on domestic matters, the world economies with few exceptions are in a high growth phase. The potential for a broad, extended growth era to lift poor nations out of poverty is quite real, though politically dicey. We believe the attractive attributes of the U.S. economy will be manifested in a stronger stock market. Investment Policy Committee Alfred A. Lagan, CFA, Chairman Daniel A. Lagan, CFA, President November 9, 2005 This information is intended solely to report on investment strategies and opportunities identified by Congress Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell of any financial instrument. 2 Seaport Lane Boston, MA 02210 www.congressasset.com
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