Outlook and Market Review - First Quarter 2009


The economy shrank by 6.14% in the first quarter, based on the preliminary announcement by the Bureau of Economic Analysis. The dismal performance of the economy in the first quarter follows a similar decline of 6.34% in the fourth quarter, which was revised downward from its preliminary announcement. The economy has had three negative growth quarters in a row. Unemployment, which normally lags GDP movements, reached 8.9% in April. Capacity utilization in the economy fell below 70% for the first time in the history of the data series. Lower energy prices and sluggish demand have kept inflation low. The core consumer price index (CPI) increased 1.8% and the top of the line CPI actually fell 0.4%. Deflationary pressures along with rapid expansion of the money supply combined to push interest rates to historic lows. The Fed Fund rate has remained stable at 0.13% since October of last year. The current 3-month Treasury bill yield is 0.15% with a 0.85% on the 2-year bond and 1.95% on the 5-year bond.

A slight improvement in sentiment provides the only glimmer of good news in the current economic climate. The University of Michigan Sentiment index has improved as has the ISM manufacturing index. However, there is a long way to go on all sentiment measures to get back out of the contraction zone in the index measures. At best, the economy is approaching a bottom, but a long hard recovery is more likely than a quick response to policy initiatives. The full effect of short-term stimulus plans will take effect later in 2009. Banks stabilization initiatives have had time to show positive results, but the consumer will take a longer time to get on board with the recovery. The second quarter of 2009 is likely to be slightly below zero with positive GDP growth unlikely until the fourth quarter. Even so, the economy is not going to approach the 2.5% long run GDP potential of the economy until 2010. Unemployment is likely to increase throughout 2009 reaching a high of 9.5%. Inflation remains dormant, but specific prices such as gasoline will take a bite out of consumer budgets.