December 2006

WALL STREET vs. MAIN STREET

Fed Chairman, Ben Bernanke spoke before the National Italian American Foundation on November 28th on the strength of the U.S. economy and inflationary expectations. Mr. Bernanke stated that the U.S. economy, in the near-term, was likely to expand at a rate below its longer-term trend. However, the Commerce Department reported that GDP grew at a 2.2% annual rate during the third quarter; up from its previous estimate of 1.6% and higher than the expected revision of 1.8%. Still, the Fed Chairman’s comments allude to slower growth ahead. “This scenario envisions that consumer spending – supported by rising income and the recent decline in energy prices – will continue to grow near its trend rate, and that the drag on the economy from the motor vehicle and housing sectors will gradually diminish,” Mr. Bernanke said.

Although there are no definitive signs that the economy is “falling off a cliff”, we have a somewhat less optimistic view of future economic growth than the Federal Open Market Committee (FOMC) members and many of the pundits in the financial mainstream, espousing a “goldilocks scenario” for the economy. We believe that further residual effects from a still developing downturn in the housing market, a persistently tepid employment atmosphere, increasing energy costs, a negative trend in the exchange value of the dollar, and a generally higher interest rate environment after the previous seventeen consecutive rate hikes will remain a deterrent to economic activity in 2007 and the sustainability of growth going forward. Yet, corporate earnings, on the whole, remain very healthy, causing a divergence between Main Street and Wall Street.