Economic Comment

As expected, the US economy continues to show signs it
will slow further. Measured yr/yr, the $ value of
production continues to rise faster than does consumer
spending. Inventory accumulation although still moderate
is accelerating. This all suggests further moderation of
production, a headwind for materials prices and a
deceleration of profits growth. The latter should be more
pronounced in Q4 '06, as last year's Q3 results were
hurt by Katrina and Rita.

The production side of the economy has been growing faster
than has the broad measure of liquidity (my M-3 proxy). This
liquidity deficit has constrained the stock market. Over
the next several months, the real economy may well require
less liquidity, leaving a positive residual for the stock
market. This does not assure a stronger market, but it would
certainly not hurt.

The yr/yr% measure of the CPI has dropped through its twelve
month moving average, confirming a moderation of inflation.
Moreover, the sharp decline of fuels and some key materials
prices so far this month reinforces the idea.