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Fourth Quarter 2004

The last quarter of 2004 reflected the year as a whole: overall positive news of economic growth combined with some indications that the economic recovery is still not on completely solid ground. The price of oil ended the year at $43 per barrel after climbing to over $55 per barrel in October, giving relief to both consumers at the gas pump and corporations in the cost of production. Industrial production increased slightly in November, and consumer confidence reached a six month high in December. 2004 GDP growth is expected to come in at approximately 4%, with predictions for similar expansion for 2005. However, there are risks to sustained growth. The unemployment rate stands today at 5.4%, which is down from a high of 6.3% in July of 2003, yet jobs have been created at only a mediocre pace as productivity increases have made it less pressing for businesses to hire. November’s job creation of 112,000 fell short of the expected 175,000. Meanwhile, U. S. consumers, who are responsible for two-thirds of the economic activity in the United States, have a personal savings level at a historic low while maintaining credit levels at historic highs. Housing starts dropped 12% in November, which may imply that the housing market, a linchpin of the U. S. economy for the past three years, has finally begun to cool. Although inflation is still low, some labor cost and commodity price pressures are appearing.

Monetary policy has anticipated increased growth ahead, and has taken a tightening approach lest the economy become overheated. The Federal Reserve Board raised the federal funds rate steadily this year, advancing rates from a record low of 1% to 2.25% after its fifth increase at the end of the year, and the Board has stated that it will continue to gradually raise rates. At their last meeting, the Federal Open Market Committee, policy-setting members of the U. S. Federal Reserve, “stressed the importance of fiscal discipline,” being especially concerned about the record budget deficit and declining dollar, which may place the Board in a position of being forced to raise interest rates to attract foreign investors to purchase U. S. debt. Fiscal policy has not been in lockstep with monetary policy; in an effort to further promote economic expansion, the Bush administration plans to advocate securing as permanent the tax cuts passed in his first term. Additionally, the administration has an ambitious but sure to be challenged agenda to reform social security to allow a private retirement option, the costs of which are estimated at between $1-2 trillion. The White House has promised to deliver a trimmed budget proposal for the coming year, the details of which are not yet known and will likely be difficult to deliver as Iraq’s instability requires continued military presence and expense.

The stock market, after declining in 2000, 2001, and 2002, has now gained for the last two years. For the year 2004, the Dow rose 3.2%, the S&P gained 8.99%, and the Nasdaq was up by 8.99%. The economic advances and relative stability in 2004 have set the economy and the stock market to perform well in 2005, yet we still remain vigilant for changes in the economic climate that could trigger volatility or decline.

Grant Rogers Elizabeth Allen

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