Fisher Capital Management: Market Performance – US Economy

Fisher Capital Management Report, Part 1 - Output growth exceeded what were once considered lofty

expectations during the third quarter, as real GDP (inflation adjusted

Gross Domestic Product) rose by a 3.5% annual pace

from the previous quarter. To be sure, this was the first gain in

economic activity after four consecutive quarterly declines in

GDP. While technically this indicates an end to the recession,

we point out that on a year-over-year (YOY) basis, economic

activity has still declined 2.3%, yet it represents an improvement

from the -3.8% YOY in the second quarter, the worst annual drop in seven decades.

The components of GDP were led by growth in personal

consumption, which increased 3.4% as stimulus programs such

as “Cash for Clunkers” allowed consumer spending to increase

by the largest amount in two years. Home construction surged

at an annual rate of 23%, spurred on by the $8,000 tax credit

for first-time buyers. Another decline in business inventories

also added to output, as did the growth in government spending

(2.3%). Though businesses increased spending on equipment

and software, fixed investment remained weak.

Market Performance, US Economy: Fisher Capital Management Report - As the positive effects of federal stimuli diminish, we continue

to project an economic recovery that is “less spectacular” than

in previous experiences. While output growth has improved as

government programs spurred consumption relative to housing

and autos, our concern rests on the economy¹s ability to sustain

these rates of growth as government programs wane.

Indeed, personal spending fell 0.5% in September after the “Cash

for Clunkers” program concluded in August. Consumer

confidence also weakened in October as the unemployment rate

approached 10%. Until we experience a sustainable floor in

housing and a ceiling on the unemployment rate, we suspect

output growth will rely on exports, inventories, and government outlays, areas that we characterize as “cushions” for growth.

Market Performance, US Economy: Fisher Capital Management Report - As the unemployment rate lingers within the range of 10% and Fed policymakers remain committed to keeping interest rates

low for an “extended period,” we look for real GDP to expand at an average rate of approximately 2.5% in 2010.

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