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:: July 2004| Page 1 of
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Dear Clients and Friends,
The U.S. economy finally appears to be at the point in its recovery that growth can be self-sustaining after the impact of tax cuts and interest rate reductions will no longer be providing additional stimulation. The latest reports show the economy has shifted into high gear, and is accompanied by growth abroad resulting in the fastest global expansion in 20 years. U.S. Gross Domestic Product in the second quarter should match or surpass the 3.9% rate reported for the first quarter. Signs of strength include the following: the leading index of economic indicators was up 4.4% year over year to an all-time high; the Federal Reserve’s monthly survey of district banks showed growth in the most sectors since the recession ended in November 2001; industrial production rose 1.1% in May, the largest monthly gain since 1997; housing starts slowed slightly in May, but permits were at a new high suggesting starts will rise this summer; retail sales in May climbed 8.9% versus a year ago and nearly 10% excluding autos; and the latest survey of consumer sentiment by the University of Michigan showed further improvement.
Even more importantly, the government reported a strong gain in jobs during May, and revised the figures for March and April significantly higher. Three months ago investors asked, “Where are the jobs?” but no longer. Employment, excluding the manufacturing sector, is up almost 2 million from the low point in 2002 and has moved 1 million above the peak in 2001. The outlook calls for further growth; the latest Manpower survey reported that 30% of employers expect to add to payrolls in the third quarter.
Corporate profits have been strong in recent quarters, but cautious executives deferred investments, and cash has built up to high levels. For the non-financial companies in the S&P 500 cash has topped $500 billion versus $260 billion at the end of 1999. Most corporations have done their borrowing or lined up credit facilities when interest rates were extremely low. Surveys show increased optimism among corporate leaders, which together with ample cash and strong cash flow should lead to increased investment as well as mergers and acquisitions. Consumers have paced the recovery, but now business spending appears poised to pick up the leadership.
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