November 30, 2001

The Commerce Department reported that the nation's economy contracted at a revised annual rate of 1.1%, in the third quarter of 2001, to the surprise of many analysts - marking the worst three month period in a decade. The Gross Domestic Product (GDP) represents the total output of goods and services in the U.S. The latest three-month period is the worst showing for the GDP since the first quarter of 1991 when the GDP recorded a noteworthy 2.0% decline (annual rate.) The much lower revised rate of economic activity during the third quarter follows an earlier report by the NBER that the nation's economy fell into recession in March [see November 26th update]. The continued pullback in consumer spending and the decline in purchases of new plants and equipment by businesses accounted for much of the dismal showing in third quarter GDP. Add to this, the residual effects from the September 11th terrorist attacks and an already slowing economy and the stage was set for a weak report. Still, some analysts believe that the surprisingly weak third quarter will be better than the fourth. Current estimates call for a 1.5% retrenchment in GDP performance for the fourth quarter. With economic statistics exhibiting such poor performance, the Fed may be inclined to further reduce interest rates at its next Federal Open Market Committee meeting - we would guess by 1/4% or 25 basis points.

November 26, 2001

On November 26th, the National Bureau of Economic Research (NBER) reported that the longest business expansion in the nation's history ended March 2001. Beyond the conventional measure of recession [2 consecutive quarterly declines in GDP], the NBER broadens its scope to include declines in manufacturing production, sales levels, and the employment picture. These measures pointed to a "broad-based contraction", according to the NBER.

The 10-year expansion in business activity, from March 1991 to March 2001, was noteworthy for more than its longevity. During the decade, real GDP expanded by some $2.7 trillion, a growth rate of 3.5% per annum, and created nearly 25 million jobs (a 2% per annum growth rate.) Unemployment fell dramatically as a result, from over 7% in March 1991 to less than 4% by March 2001. The fact that a recession has been officially pronounced should be of no surprise to anyone. The length of this recession however may surprise some. Our guess is that a V-shaped recovery this time around may be hard to come by with the loss of so many manufacturing jobs during the past decade. Good, steady jobs disappeared from our borders as corporations looked for ways to reduce the labor costs - manufacturing employment being the major one. The service sector and the public sector accounted for a good deal of the improvement in the unemployment rate over the past decade. A prolonged recovery is more likely in our opinion.

In other news, the Conference Board reported that Consumer Confidence fell in November to 82.2 from a revised October reading of 85.3, marking the fifth consecutive monthly decline. Within the Conference Board's report it cited worries over layoffs and job security as a sign that shopping may be less robust than some had hoped for this holiday season. Lynn Franco, director of the Consumer Research Center, offered "Rising unemployment and continuing layoff announcements are dampening confidence, ... A turnaround in confidence levels is not likely before year's end,". The worry here is that continuing declines in confidence may lead to a further pullback in consumer spending, which accounts for approximately two-thirds of U.S. economic activity. Such dismal reports only contribute to pushing back the timetable for an economic recovery.

November 12, 2001

On November 6th, the Federal Reserve reduced the Fed funds and discount rates by 50 basis points or 1/2%, to 2.0% and 1.5%, respectively. The cuts represented the 10th consecutive reduction this year and brought these rates down to a level not seen since 1961. The move was prompted because of the continuing and worsening contraction in the U.S. economy, especially in the manufacturing sector, but also spreading rapidly to the service sector. The September 11th terrorist attack on the World Trade Center negatively impacted consumer confidence to a degree that brought about a severe contraction in consumer spending within the retail sector. Only large rebates and discounts offered by manufacturers, i.e., 0% interest rates for auto purchases, in various areas of the retail economy generated any noticeable consumer interest. Nevertheless, inventories remain ample coming into the uncertain Christmas selling season that lies ahead. We suspect that the holiday season will not be a jolly one for retailers across broad segments of the American economy.

In addition to retailers and manufacturers, the service industries are being hard hit for the first time in years. Revenues from newspaper, radio, magazine and Internet advertising have plunged since September 11th and the contraction is likely to continue except for sporadic surges from efforts by retailers to reduce inventories through the holiday season.

To a greater extent than previously thought, the rapid decreases in the Fed funds rate and the discount rate by the Federal Reserve since January 1st may well prove to be too little and too late in its efforts to bolster the economy and support a shaky monetary system. Even another rate decrease - expected in December - may do little to restore confidence and could very well start people thinking that the overall economic situation is far worse than the government has acknowledge to date. One should note carefully that any recoveries within the leading economic indicators since the events of September 11th have been confined to the securities markets, i.e., areas that are largely a function of fiscal and monetary policy. In the real economic world, any recovery has been difficult to perceive. Going forward, one should look for more tangible indications of a real business recovery, which would be reflected in an expansion in industrial production, higher gross domestic product numbers, and subsequent expansions in retail sales. These indications will be the harbingers of worthwhile economic recovery and these indications have yet to be seen on the horizon. Only some financial indicators are positive at this writing.

In addition to the purely economic and business problems confronting America, recovery from this debacle will be slowed and hindered by international problems. This could impact the way in which foreign investors view America as a haven of security in an increasingly hostile and unstable world. Some reports from reliable sources suggest that upwards of 400,000 troops will be needed to rout out the Taliban. Over and above the threat from the Taliban is the growing hostility between the Islam and the West.

It is within this framework that one must invest and maintain - even hopefully increase - one's wealth as well as sustain the standard of living established for your family.