A. ECONOMIC OPTIMISM
Third quarter corporate earnings are in line to increase an average of more than 16%, and may turn out to be a little better than expected. Although manufacturing was slightly off for the month, it was greatly negated by a rise in orders. However, the big news this past Friday is that for the first time in eight months, the job payrolls for September have finally improved, dropping from over 400,000 to 382,000. Some industries, like residential construction, have remained robust. The travel industry is showing signs of improvement with hotel occupancies/rates rising as well as airline bookings. Another positive indicator includes a pickup in back to school retail sales that were above forecasts for major retailers. Retailers are also trending up their Holiday sale forecasts, looking for their best season in three years. The national deficit also improved this past month, helped by devaluation and a lack of increases in most import prices. Interest rates for 10-year Treasuries fell from a high of about 4.6% to under 4% during the last month, and presently in the middle of this range, have also been favorable. It is looking like the GDP for the third quarter will beat many estimates and be over 5%. The fourth quarter is also on track to possibly better third quarter results. All of this has had a positive influence on most stock indices pushing them near 15 to 18 month highs. Specifically, NASDAQ is up 43% and the Dow Jones is up 16% on the year. However, the past 12-month performance is even more impressive with respective increases of 70% and over 30%.
Despite the good news, some analysts believe this is anticipated and already reflected in the stock pricing and it will be very difficult for stocks to break out further in the near term. In addition, there are some other signs that not all is rosy. Consumer confidence declined this past month and corporate irregularities persist. It was revealed that others are involved with excessive compensation on the Board of the NYSE, that some brokerage firms are involved "market timing" trading in mutual funds with hedge funds and more information about IPO misdealings during the dot com boom is coming to light. Additionally, it appears some Federal Home Loan Bank Boards are having investment problems. Most importantly, major automakers indicate that they will be laying off thousands of workers in the coming year. Even though there was finally some improvement with fewer people on unemployment this past month, these future layoffs will have a ripple effect and will further advance the continuing trend of manufacturing jobs leaving this country in order for companies to remain globally competitive.
The productivity gains due to technology, together with decreasing costs, have fueled an increasing economy. Yet, the prospects for job gains has remained dim enough for some to believe that the Federal Reserve may still need to slight lower rates. The lack of a jobless recovery has been a major reason for the softness in rates recently. In the past couple of years, workers jobless for more than six months have risen from several hundred thousand to over two million; nearly a threefold increase. Of course, the underlying concern is that without greater job gains, consumer spending cannot be broad based and will therefore be insufficient to sustain a strong economic rebound. Though the economy seems destined to finish this year strong, there is mounting concern that the economy will loose steam in 2004. This, along with unrest and continuing problems in Iraq, will place increased pressure on President's Bush reelection prospects for the coming election year. Top
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