The following review of economic trends reflects conditions as of December 15, 2003.

After months of waiting for the employment picture to improve, the news that more than 250,000 jobs were created in September and October provided a welcome boost to the domestic economy’s prospects. Although the gross domestic product (GDP) improved impressively throughout the year, the lack of job creation troubled many observers. Job creation is viewed as a lagging component of any economic recovery, although it seems to be materializing even later than many people had expected it would. Any indication that job growth has resumed is good news because it confirms other signs of recovery.

The most recently released Commerce Department figures indicate that the economy grew at an 8.2 percent annual rate in the third quarter. Second-quarter growth measured 3.3 percent. Third-quarter growth has been attributed to increased spending from consumers, businesses and government. Tax rebate checks and lower tax withholding left consumers with more disposable income, which found its way back to retailers. Interest rates remained near 50-year lows and provided an incentive for both consumers and businesses to borrow for capital expenditures.

Another positive data point was the 8.1 percent growth in productivity for the third quarter, which helps to explain the lack of urgency in hiring. Simply put, 95.3 workers have been able to accomplish the work that would have required 100 workers a year ago, according to statistics published in The Wall Street Journal. Productivity growth may have peaked in the third quarter; if it slows down, businesses will likely add workers to grow.

The Federal Reserve is leaving the overnight interest rate alone for the time being. The federal funds target rate remains at 1 percent, a 45-year low. The Fed views deflation as the greatest risk to the economy, although a remote possibility. There is still enough slack in the economy, with regard to idle capital and labor resources, to suggest that the economy has the potential to grow at a higher-than-average rate for several quarters.

Lending credence to the idea of a strengthening economy is the news that The Conference Board’s index of leading indicators increased 0.4 percent in October. This index, which includes components that are generally regarded as reliable predictors of economic growth, has increased at a 5.7 percent annual rate over the previous six months. The indexes of coincident indicators (those that accompany economic growth) and lagging indicators (those that follow economic growth) also increased in October. The Conference Board’s Consumer Confidence Index also shot up to a level unattained over the last 12 months.

Producer prices fell 0.3 percent in November. The year-over-year change in the Producer Price Index measured 3.4 percent. Retail sales rose 0.9 percent in November, after declines in September and October. Automobile sales were mostly responsible for the increase.

The housing market, a pillar of the economy through the recent lean times, hasn’t shown signs of quitting. The National Association of Realtors (NAR) reported that sales of existing houses rose to record levels in the third quarter, despite 30-year, fixed-rate mortgages rising to 6.05 percent from historic lows. The median price of existing houses sold in the third quarter rose 10.1 percent (to $177,000 from $160,800) compared to 2002’s third quarter, due to historically low inventories of houses available for sale.

The Stock Market
Stock prices rose strongly in October on the heels of the positive economic news and corporate earnings reports but retreated in early November. Despite this, the major indexes remained well ahead for the quarter. The pullback can be attributed to a combination of reasons, including the declining value of the dollar, trade concerns and the situation in Iraq. Furthermore, investors may be feeling somewhat tentative, as stock prices have increased substantially in a short period of time, which calls for a review of price-to-earnings ratios. The market went nine months without a correction of as much as 5 percent; perhaps this reversal was due.

All major sectors are up for the fourth-quarter-to-date. The best performers have been basic materials and industrials. The telecom sector is still down more than 3 percent for the year, but is up more than 4 percent for the quarter-to-date. All other major sectors are up for the year at this time.

Source: The Wall Street Journal

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The above article is for general information only and is not intended to provide specific advice or recommendations for any individual. Consult your attorney, accountant, or financial or tax advisor with regard to your individual situation.

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