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Economic Update - First Quarter 2003 by Arnfield P. Cudal
Despite the uncertainty, Americans remain persistent
Consumer Fundamentals or War Fears?
As fears grew over the impending war with Iraq earlier this quarter, economic growth fell. But as war began, financial markets spiked as investors renewed optimism for its quick and decisive end. And with every report of military success or failure, volatility in the markets followed. Despite the uncertainty, Americans remain persistently optimistic and are eager to see the economy rebound.
Employment, consumer consumption and confidence continue to sour American optimism. Consumer spending growth, helped in part by cash-out refinancing, slowed sharply this quarter, suggesting that the cash-out refinancing binge has subsided and that equity ratios have been depleted. March’s unemployment data remained unchanged at 5.8 percent. “Discouraged job seekers” - those who have given up trying to find a job and have dropped out of the unemployment picture contributed to an additional 108,000 decline in payroll jobs. Weakness dragged consumer confidence was at its lowest level in a decade.
The Federal government, juggling the tasks and costs of war, moved to shore up the economy with stimulus packages designed to reduce taxes and to provide income supports and stabilizers for the economy. Income supports such as tax refunds and reduced withholding taxes boosted personal income growth by two percent. Tax refunds are reported to be 15 percent above last year, and withholding taxes are down six percent. Americans saw their personal taxes decline three percent over the past year. These shifts manifest government intervention and have kept disposable income healthy.
The Treasury curve remains steep. Fear that inflation may return and an accommodating Federal Reserve have kept the curve at its steepest level since 1992. Because of its steepness, investors are rewarded with extension trades. This means that those willing to invest monies for longer periods receive higher yields. But because many more would rather have readily available cash reserves, especially in difficult economic times, demand for short term securities has risen - causing dramatic declines in short-term rates.
If war risks increase in the coming months, confidence and spending will continue to be mired. Businesses will continue to exercise caution in hiring and consumer spending will be reigned-in. In this case, market and consumer fundamentals will continue to deteriorate. But, should the war in Iraq continue with minimal casualties and the shock of war fades, optimism will prevail, and the market will rebound. Oil prices will likely subside and the Dollar will rise against the Euro. Consumer fundamentals, instead of war fears, will dictate market direction and consumer spending will once again be the cog in the wheel for renewed economic recovery.
(Arnfield Cudal is an Investment Analyst for the Clerk’s Office)
Finance Department:
Finance Department Minutes Division 3rd Quarter Report FY 2002 4th Quarter Report FY 2002 1st Quarter Report FY 2003 2nd Quarter Report FY 2003
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