…it is the worst of times.
It all depends on which newspaper you read or network newscast
you listen to. Despite a recession, a doubling of oil prices,
a quadrupling of interest rates, a catastrophic hurricane
season and a war against terrorism, the economy and the stock
market continue to exhibit strong returns. Third quarter GDP
was recently revised upward to show a 4.3% annual rate of
growth and although that rate is likely to slow next year,
3% looks good. We now have had a ten quarter streak of growth
above 3% (best since 1986). Personal income rose by .4%, and
personal spending was .2% higher. The National Retail Federation
reported that sales jumped 22% over last year for the first
weekend of Christmas shopping. The housing market is cooling
yet sales of new homes continue to set records. More than
200,000 new jobs were created last month and the unemployment
rate remains at a low 5% (France is at 10% and Germany over
11%). Despite recent layoffs at GM, Ford, Merck, etc., manufacturing
added 11,000 jobs last month. Core inflation (absent oil and
food) remains a low 2% and consumer confidence is accelerating.
Americans now have a net worth in excess of $50 trillion,
twice the level of ten years ago and have over $5 trillion
in savings and money market funds. Want more? Despite twelve
rate increases, interest rates in general are at historic
low levels, and the stock market is flirting with 11,000,
a level not seen since June 2001. This is an economy to be
proud of, all things considered. Yet to many, the sky is falling.
Things will only get worse from here, Iraq is another Vietnam,
there is still a housing market bubble about to burst, China
will swallow us up and much higher energy prices lie ahead.
The onslaught of negative news is having more of an impact
than the reality of the good news. A recent poll showed 43%
of Americans believe we are in a recession, up from 28% in
July. Maybe it is the fault of the current administration
for not getting the good news out. This country was built
on an optimistic attitude, and it boggles the mind that there
are so many that want to bring down this attitude. Our country
has a long history of innovation and economic progress, and
this will not be destroyed by the current negativity.
A panel in Britain urged that the retirement age be raised
from 65 to 67 or higher and that a major pension change would
include the introduction of individual investment accounts.
Why is it that we come up with these good ideas and other
countries implement them while we get bogged down with partisan
politics? The flat tax is another example that has taken hold
in Russia and other former eastern European communist nations.
Verizon Communications said that it will stop making contributions
to the guaranteed pension plan. It will instead offer the
50,000 managers it covers a 401K plan thus eliminating their
defined benefit plan. Chief executive Ivan Seidenberg said,
“This restructuring reflects the realities of our changing
world.” The company hopes to save about $3 billion over
the next decade. GM, Ford and others are also experiencing
financial problems brought on in large part by under funded
defined benefit plans. Which brings to mind the nations largest
under funded defined benefit plan – Social Security.
Britain gets it. When will we?
This just in. Productivity growth was revised upward to
4.7% from 4.1% in the third quarter, the biggest gain in two
years. This is a key indicator for the Fed because it is a
major factor in determining long term economic growth. Productivity
plus growth in the labor force equals growth in GDP. When
these factors are rising the Fed becomes concerned about inflation.
This almost guarantees another quarter point hike in interest
rates when the Fed next meets on December 13th.
It’s hard to believe that 2005 is drawing to a close.
It was a year filled with dramatic events, but maybe they
are all becoming dramatic as communication and globalization
shrink our planet.
Once again we wish all of you
a happy and healthy 2006.
Random thought for December 2005:
If you toss a penny 10,000 times, it will not be heads 5000
times, but more likely 4,950. The heads picture weighs more,
so it ends up on the bottom more often.
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