Financial Watch

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.

Government spending and consumers continue to provide a disproportionate boost to overall GDP. Government spending for national defense jumped by annualized 10.2% during the third quarter. The biggest worry facing consumers is a negative savings rate. This indicates consumers are increasingly using credit cards and loans to fund their daily lifestyles. Increasing interest rates will place an added burden on consumers. At some point the consumer sector will slow down. Present trends are indicating that once this happens the overall economy will slow to less than desirable growth levels. Financial Watch believes economic growth will be near 3% during the fourth quarter of 2005.

On additional note, Financial Watch expects payroll growth to come in at 50,000 when it is reported tomorrow morning. This is well below consensus estimates of 125,000 jobs.