Financial Watch

For most of last year, elected representatives concern for our large trade and current account balances put pressure on China to revalue their currency. China responded with a modest revaluation last summer, but continued its policy to intervening in the foreign exchange markets to keep the yuan from appreciating too much. President Bush is set to meet with China’s president later this month and this meeting have renewed calls for China to do more to open up its growing economy to U.S. firms.

Economists initially puzzled over why outgoing Federal Reserve Chairman Alan Greenspan mentioned increasing utilization rates as a reason for possibly continuing the Fed’s tightening campaign. However, Friday’s employment data clearly pointed to signs of the economy reaching a point where labor resources were fully utilized. An unemployment rate of 4.7% strongly signals job seekers are in a strong position to negotiate higher compensation packages. At the same time, in past periods of economic expansion the present unemployment rate would have required widespread wage increases to attract qualified workers. This does not appear to the case at this point in time as strong salary increases have been limited to selected fields such as accounting.

Gross Domestic Product (GDP) rose at annual rate of 1.1% in the final quarter of 2005. This was well below consensus estimates of 3% growth and the weak number raises concerns about the direction of the U.S. economy. Slow automobile sales and lower than expected inventory growth provided the biggest drags on economic growth during the latest quarter. Financial Watch expects GDP to be revised slightly upward during the coming months as the Commerce Department works through typical revisions as more data is made available. Corporate earnings have come mostly in line with expectations and revenue figures do not indicate any signs of slow growth. Lingering impacts from hurricanes Katrina and Rita clearly put a dent into growth. Rebuilding in the first half of 2006 should provide a modest boost to economic growth and we continue to believe the U.S. economy will grow by slightly more than 3% in the current year. The biggest positive coming out of this quarter’s GDP figures is a strong increase in disposable incomes. With more money in their pocketbooks consumers should be able to reaccelerate consumption growth in the coming quarter, which will hopefully offset the negative impact of a slowing housing market.

GDP came in at a strong 3.8% during the third quarter of 2005, which was significantly ahead of our estimates at Financial Watch. The figure is subject to more revision than most GDP reports due to the increased volatility caused by Hurricanes Katrina and Rita. We expect GDP to be revised slightly lower in the coming months. The biggest positive to come out of the report is the boost international trade provided to GDP. For many years the U.S. trade deficit has been a drag on economic growth. Financial Watch still believes significant steps still need to be taken for the U.S. economy to directly benefit through international trade.

Last month the Bureau of Labor Statistics surprised just about everyone by reporting that 274,000 jobs were created during the month of April. Few economists were predicting an equally strong number for May’s report as the consensus forecast was for a modest 180,000 jobs. Friday’s announcement that only 78,000 jobs were created during May disappointed economists looking for signs of continued economic growth. Friday’s report reinforced the volatile nature of the survey, but it also confirms the U.S. economic growth is slowing down.

Financial Watch expects April’s job growth to come in at a moderate 160,000 jobs. This is just below the consensus estimate of 170,000 jobs. Unemployment should remain unchanged at 5.2%. April’s job report can expected to be more positive than last month’s report that showed only 110,000 jobs were created during March. The bounce expected in this coming job report would return job growth to the pattern we have been seeing over the past year.