Economic & Profits Indicators

The broad economy has flattened out over the past 3-4
months as measured by consumer spending, production,
employment and real wages. Inventories have been tightly
managed, but even so, the US is vulnerable to a downturn.
Housing development activity remains in a steep downtrend
and starts are likely to drop below the 1 mill. mark on
an annual rate basis -- typical for a housing recession.
As I have discussed, inflation has sapped consumer spending
power and since companies have been too tightfisted in
adjusting pay levels, recovery of purchasing power likely
awaits an easing of inflation pressure. Individual company
managements may be prideful of maintaining wage discipline, but
collectively, the discipline is working to bring down the
economy.

Federal Reserve Bank Credit and the broader measure of credit
driven liquidity are not growing fast enough to support
sustainable growth. Fast falling short rates is a positive
for the future as is the recent weakening of the oil price. On
balance, however, the Fed is running a risky policy short term
when it comes to growth, and if the economy falls into a downturn
in this a national election year, there will be all hell to pay
at the Fed.

The proposed minimal $150 billion stimulus program to provide
rebates to household taxpayers is essentially a fuels subsidy, but
it will help folks with their budgets.

Profits, excluding the financial sector, are coming in better than
expected. The average US commercial or industrial enterprise is
struggling to maintain margins in a slow environment, but tech
companies have had a very strong year and oil producers are
experiencing dramatically higher crude lifting margins. Financials
are in the red collectively. Earnings for nonfinancials from
overseas operations remain fairly strong. Looking ahead, the first
half of '08 will reflect the weaker US economy and slower growth
abroad.