Cover, Applied Analysis National Economic Indicators Monitoring Series

January 2012

The final months of 2011 were largely met with optimism as spending through the holiday season grew, investors loosened their wallets, and employers began to show signs of hiring in the coming year. While large macroeconomic concerns such as the long-term unemployed, housing prices and financial woes abroad still lurk in the shadows, the fourth quarter looked much different than the prior ones, a welcome change after several years of being fed only pint-sized bites of positive news.

In the fourth quarter of 2011, gross domestic product (GDP) expanded at an annual rate of 3.0 percent, according to the second advanced estimate by the Bureau of Economic Analysis. Although the economy generally requires a sustainable annual growth rate above 3.5 percent to carry the country out of a recession, the latest period represents that largest expansion in GDP since the second quarter of 2010, a hopeful sign for 2012. The increase in GDP was largely sourced to personal consumption, which improved 2.1 percent overall, from a 15.3-percent increase in durable goods (e.g., furniture and appliances) and a 0.4-percent rise in non-durable goods (e.g., food and clothing). Additional improvements from both nonresidential fixed investments (+2.8 percent) and residential fixed investments (+11.5 percent) helped push GDP upward during the fourth quarter as well. While consumers and businesses are seemingly more willing to spend, government spending continues to contract and will likely continue doing so in the foreseeable future. Output from the federal government declined by 6.9 percent, largely due to a 12.1-percent decline in defense spending. Local and state governments also continue to pullback with expenditures and investments declining by 2.5 percent in the same period.

The increase in GDP is partially aligned with reported rises in personal income, which moved upward 2.6 percent, or $82.6 billion, in the fourth quarter. Disposable personal income edged slightly higher with an increase of $42.7 billion, or 1.5 percent, from the prior quarter. Offset by increased spending, the personal savings rate declined to 3.7 percent from 3.9 percent in the third quarter of 2011. Both a rise in spending and income coupled with a decline in the savings rate further suggests consumers are gaining confidence in the future and spending current dollars. As directly measured by The Conference Board, the Consumer Confidence Index reached 64.8, with the Future Expectation Index, a measurement of consumers' expected condition six months from now, posting a score of 77.0. Both indices were the highest recordings since April 2011. When asked about current conditions in the economy, respondents in December 2011 recorded an average of 46.5 on the Present Situation Index, its highest level since September 2008. While these indices remain volatile and are vulnerable to variables outside the U.S. economy, it is important to note their steady upward trajectory near the end of the year.

While much can be said about the gains in consumer confidence, the housing market, which has been on a downturn for nearly five years, provides cause for caution. Using the latest data (November 2011) from the S&P Case-Shiller Home Price index, 18 of the top 20 U.S. home markets have reported declines in pricing compared to a year ago. Overall, the Composite 20 Index has declined 33.5 percent since its peak in April 2006. Although the decline over the last year has been less severe at 3.7 percent, several metropolitan areas such as Atlanta (-11.7 percent), Las Vegas (-9.2 percent), and Seattle (-6.3 percent) still report aggressive declines.

Without a positive performance in the fourth quarter, the financial markets would have posted a loss for the year. A surge over the last three months of 2011 proved to be beneficial to the overall economy, and as a leading economic indicator, hope for a better year ahead emerged at the 11th hour. For the fourth quarter of 2011, the Dow Jones Industrial Average increased 11.9 percent, the strongest improvement over the quarter of any broad U.S. equity market. The Standard & Poor's 500 Index also posted a double-digit gain of 11.1 percent, while the NASDAQ pushed upward 7.9 percent.

Looking into 2012, exposure from the euro debt crisis, Greece in particular, remains a dark cloud over the markets. A larger concern going into the new year continues to be sourced within our own borders. Leadership on the economy from Capitol Hill remains to be seen and with a Presidential election year ahead, it is likely that little legislation will move forward to improve the economy. With the Joint Select Committee on Deficit Reduction responsible for finding a way to reduce the U.S. budget deficit by at least $1.2 trillion flopping during the fourth quarter, a legislative trigger is still set to reduce the deficit by the same amount. Nevertheless, the lack of bipartisanship will continue to create risk and uncertainty in the coming year, while policies such as extensions in the payroll tax cut and unemployment benefits have a more near-term significance in driving the economy forward.

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December 2011

Mixed Economic Indicators Provide Uncertainty Regarding the Timing and Slope of the Recovery Cycle

It has been more than two and a half years since Congress passed the American Recovery and Reinvestment Act of 2009, under which $720.1 billion has been given out to date. Unfortunately, little has yet to materialize in the way of employment improvements. The $298.5 billion in tax benefits have little nexus to job creation, and the $211.4 billion towards entitlements is akin to giving a heart attack patient aspirin. It is no wonder the remaining $210.2 billion in contracts, grants and loans (of which $87.0 billion went to stabilizing state government funding) has done little to revitalize the national economy. There is little doubt that elements of ARRA were necessary and appropriate at the time, but the economy has been left to run in place with no follow-up care. Now, with mixed economic indicators during the third quarter, the national economic outlook remains uncertain at best.

The third quarter advance estimate of gross domestic product (GDP) came in at an annual rate of 2.5 percent, its highest in a year. While the report was favorable with increases in personal spending (+2.4 percent), business investment (+16.3 percent), and non-residential construction (+13.3 percent), the growth rate is nowhere near the level it should be in a post-recession environment. Fears that state and local government spending will continue to contract as it did in the third quarter (-1.3 percent), along with disposable personal income (-1.7 percent), plays a large role in keeping demand restrained. Only a small mix of sectors is reporting job growth, and until the broader economy begins to see a path to full employment once again, skepticism and uncertainty will dampen the nation's growth prospects.

For the three months ending September 2011, 374,500 mass layoffs occurred in private-nonfarm sectors, a 15.9-percent increase compared to the same period a year ago. Even though the 287,000 jobs added into the labor force during the third quarter of 2011 is a step in the right direction, it is a figure the economy should be reporting each month, not per quarter. A gain of less than 100,000 jobs per month cannot keep pace with those wishing to enter the labor force. To put the needed job gains into perspective, the labor market needs to add an average of 300,000 jobs per month over the next year simply to bring the unemployment rate down to 8.0 percent. Today, the unemployment rate stands at 9.1 percent, unmoved for the past three months. On a positive note, total nonfarm job openings have been rising for the better part of two years, approaching nearly 3.1 million in August 2011. While this is a rise of 44.7 percent since bottoming out at 2.1 million available employment options in July 2009, 13.5 million people remain unemployed or nearly 4.4 job seekers per each job opening.

This mix of information and weaker-than-expected growth seems to reverberate through not only the homes of Americans, but the trading floors of stock exchanges worldwide. During the third quarter, equity markets pulled back by double digits and to levels not seen in nearly a year. The Dow Jones Industrial Average declined a staggering 11.0 percent, only to be outdone by the NASDAQ Composite Index and Standard & Poor's 500 Index, which fell 11.9 percent and 13.5 percent, respectively, during the quarter. Downward movements in the markets were largely sourced to the spider web of debt financing centered on continued uncertainty in the European Union around a potential bailout package to prevent Greece from fiscal default. That said, birds of a feather flocked together during the third quarter, pushing global markets south as well, including: Japan (Nikkei 225, -11.2 percent); Hong Kong (Hang Seng Index, -20.1 percent); the United Kingdom (FTSE 100, -12.4 percent); and Germany (DAX; -24.6 percent). Daily 100-point swings in the markets have lately become the norm rather than the exception, causing further speculation about a second market collapse that would tug the rest of the economy downward. Better said, an indication of a declining market puts downward pressure on consumer confidence.

The Consumer Confidence Index remains fragile as it lingers at a level normally recorded in a recession. During the month of September 2011, the Conference Board's monthly index rose 0.2 points to 45.4, but the increase does not hold much weight when it remains less than it was one and two years ago. Additionally, it has weakened by 12.2 points from the second to third quarter. Consumers' expectations looking forward also pulled back during the quarter. Although the Expectations Index has enjoyed some measure of optimism averaging in the mid-80s for most of the year, it ended the third quarter at 54.0, a decline of 17.7 points since the second quarter. In addition to consumer confidence remaining frail, the Conference Board's measurement of CEO Confidence is at its lowest level in more than two years. Falling from 55 to 42 during the third quarter, CEOs' outlook has worsened with the majority echoing negative responses regarding economic conditions. If there is any truth to the trickledown effect, an economic rebound certainly will not take place if those at the top are feeling pessimistic about the future.

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August 2011

Economic Expansion Remains Sluggish While Uncertainty Persists

Uncertainty remains the only thing certain. Three months ago, a shutdown of the United States federal government was avoided at the 11th hour. More recently, congressional approval of a higher federal debt ceiling followed the same path. The uncertainty that comes from watching lawmakers get as close to the cliff as possible is likely having undue consequences even if disaster is ultimately avoided. While attempts to rein in spending on underfunded promises are long overdue, the lack of any long-term compromise from lawmakers, many of whom have a vocabulary limited to "no," is potentially causing pullback and preventing a sustained recovery from taking hold. From a macro standpoint, austerity measures among sovereign debt concerns throughout parts of Europe continue to undermine investor confidence.

The U.S. economy continues to expand at a slower pace than expected. Based on the first advance estimate by the Bureau of Economic Analysis, real gross domestic product increased at an annual rate of 1.3 percent in the second quarter of 2011. Real gross domestic product includes goods and services produced by labor and property within the United States, less imports. It is important to note that the slowdown in the economy since the beginning of the year was much more drastic than previously thought. Recently revised estimates indicate that real gross domestic product increased 0.4 percent in the first quarter of 2011, rather than the previously reported rate of 1.9 percent, largely attributable to underestimated new vehicle inventory values and spending on imported oil. The 1.3-percent rise in real gross domestic product in the second quarter of 2011 can be attributed to positive contributions from exports (+6.0 percent), nonresidential fixed investment (+6.3 percent) and federal government spending (+2.2 percent). However, these gains were partially offset by a decline in state and local government spending (-3.4 percent) and an increase in imports (+1.3 percent).

State and local government spending has already come down significantly since the recession. In real dollars, GDP has increased 8.3 percent over the last two years, yet local and state government spending has increased a much smaller 1.1 percent over the same period. According to The National Association of State Budget Officers, 23 states made mid-year budget cuts in fiscal 2011. If the economic recovery continues to weaken, it is likely that many states will again have to make adjustments during fiscal year 2012. Coupled with an expected decline in federal government spending, which together with state government spending totals 20.2 percent of GDP, it is easy to see that growth could potentially be held back further.

After a tumble in March, the Consumer Confidence Index rose in the first month of the second quarter to 66.0. However, the gain was short lived as the index declined in May and June, ending the quarter at 58.5. June's rate is the lowest level reported since November 2010. Consumers' assessment of the present situation did not move quite as much, ending the quarter 0.1 points higher at 37.6. Nevertheless, consumers' future expectations pulled back sharply in May and June, ending the second quarter at 72.4 or 11.0 points lower than it began. The measure of consumers' assessment of current conditions remains the only index in the Consumer Conference Board Survey that is reporting stability, indicating uncertainty about the future may be a larger problem undermining consumer behavior.

Moving in a similar fashion to consumer confidence during the second quarter, the U.S. equities markets remained relatively flat at the end of the second quarter. The broader equities markets witnessed a rise in late-April before falling through mid-June, only at the end of the quarter returning to levels reported nearly three months prior. The rise in late April was largely due to favorable economic data, particularly regarding the labor market and returning supply chains out of Japan. However, with weakening labor reports and disappointing earnings for some companies, the markets, similar to the broader economy, couldn't sustain their upward momentum. During the second quarter, the Dow Jones Industrial Average increased a slight 0.5 percent, but the Standard & Poor's 500 Index and NASDAQ Composite Index both declined 0.6 percent and 0.12 percent, respectively.

Looking towards the second half of the year, businesses will likely remain hesitant in progressing towards any significant expansions in investments and hiring. If the previous two fiscal showdowns (the 2011 budget and the debt-ceiling increase) are a depiction of what is ahead, lawmakers will likely focus their attention toward the 2012 federal budget, an expiration of the gas tax on September 30th, and the outcomes recommended by the deficit panel (aka Super Committee) due just before the Thanksgiving recess. All of this coupled with lawmakers' attention towards re-election campaigns will likely further deviate their interest in actually growing the economy.

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March 2011

GDP Growth Decelerates as Government Spending Slows

Pointing in various directions at the end of the first quarter of 2011, a collection of indicators provided more questions than answers on the future of the economy - particularly the recovery. While the recovery timeline remains somewhat uncertain, the proverbial economic engine is not tuned for optimal performance, with some backfires occurring throughout the first quarter. The overthrow of Egypt's President, additional uprisings throughout the Middle East, ongoing military efforts in Libya, a devastating earthquake (and nuclear disaster) in Japan, skyrocketing fuel prices and a budget showdown in the United States are a few reasons skepticism surrounding a robust national recovery remains. Many of these incidents were unavoidable, but they do have significant effects on economic output, and perhaps worse, confidence.

According to the advance estimate, the United States' gross domestic product (GDP) or total economic output for the first quarter of the year increased at an annual rate of 1.8 percent, losing strength from the 3.1 percent growth rate witnessed in the prior quarter (Q4 2010). GDP decelerated largely due to a pullback in spending compared to the prior quarter. Personal consumption expenditures grew at 2.7 percent, compared to 4.0 percent in the prior quarter. Federal government spending declined 7.9 percent during the first quarter, and imports, which are subtracted from GDP, grew 4.4 percent, compared to a decrease of 12.6 percent in the previous quarter. Federal expenditures are expected to continue declining, especially after $38 billion in cuts were included in the recently passed 2011 budget.

After climbing for six months, the Consumer Confidence Index fell sharply during the month of March. Retracting 8.6 percentage points from its three-year high posted in February, the index settled at 63.4, the same level posted at the end of 2010. Sharper downturns occurred among consumers' future expectations, a survey measuring expected business, employment, and income conditions in the next six months. Consumers' future expectations reached a level of 97.5 in February, a point not last witnessed since January 2005, before significantly turning down 16.4 percentage points in March and declining to 81.1. Oddly, consumers' assessment of current conditions edged slightly upward throughout the quarter to 36.9. Current conditions have improved moderately for seven consecutive months.

As consumer confidence declined late in the quarter, stock markets moved in a different direction. Although the U.S. equities markets fell several percentage points following the March 11 earthquake in Japan, they were not held down for long. During the first quarter, the Dow Jones Industrial Average increased 6.4 percent, Standard & Poor's 500 Index gained 5.4 percent and the NASDAQ Composite Index expanded 4.8 percent. While the long-term effects of the subsequent nuclear disaster linger, supply disruptions from Japanese manufacturers remain a concern but have so far not hampered investors' expectations.

The larger concern stems from the speculation of supply disruptions surrounding petroleum, which is no doubt scaling back economic growth. Higher fuel prices, which will likely remain elevated as we approach the summer (high demand) season have the unique ability to slow down growth as consumers watch the price of their own gasoline, plane tickets, and other items tug upward. Such inflationary pressures, if they persist and increase at a greater rate than personal income, which rose 0.3 percent in February, can slide back economic growth or further reduce consumer confidence. For comparison purposes, personal income has grown 5.1 percent over the last 12 months, while the spot price for a barrel of West Texas Intermediate oil has risen 26.7 percent, from $81.24 to $102.94. It is important to note that the latest spike is largely attributable to the unrest in the Middle East, but if concerns continue or there is a major supply disruption, we can expect energy prices to maintain an upward trajectory.

Looking ahead, there is rising concern that the federal debt ceiling will need to be adjusted, as it is expected to be reached in May (it is currently limited to $14.3 trillion). Congress compromised to avoid a shutdown, but the debt ceiling and an upcoming budget battle for 2012 will likely mean more programs will have to come to the cutting board. These debates also come after Standard & Poor's recently reported that its U.S. credit rating remains AAA, but it would revise its future outlook to negative. The legislative ripple effect of these next two budget battles could have far worse consequences in the near term on the broader economy and GDP than the latest fight. With many state and local governments, including Nevada, attempting to fill their own budget gaps caused by the Great Recession, the reduction in federal spending could further slow any economic recovery but must be balanced with longer-run objectives.

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December 2010

A lawn mower will not usually start on the first pull. The same goes for an economy, especially one that has been idle for as long as the Great Recession. Having gone through a dozen recessions since World War II, it might be baffling to think that we still don't quickly know how to get an economy on a path of sustained growth. Every recession is different and therefore, every recovery is different. While the monetary and fiscal policy tools we have at our disposal haven't changed much in this time, we still have to plot ourselves on a path to full recovery, one that includes: a new reality in consumer spending; a record income gap between the rich and poor; unprecedented levels of debt and deficits; and low inflation.

According to the advance estimate, the United States' gross domestic product (GDP) or total economic output for the fourth quarter of 2010 increased at an annual rate of 3.2 percent, strengthening from the 2.6 percent growth rate witnessed in the prior quarter (Q3 2010). The latest acceleration is largely due to a significant deceleration in imports and an expansion in residential fixed investment. Personal expenditures on services and durable goods increased 4.4 percent and 21.6 percent, compared to the previous quarter, respectively. In particular, final sales of computers added 0.31 percentage points to the fourth-quarter change in real GDP. Along with rising expenditures, personal income as of December 2010 (latest data available) is up 3.8 percent year-over-year compared to a 0.4-percent increase witnessed during the same period of the prior year. We would expect this relationship, but expenditures still have room to grow as the savings rate remains elevated at 5.3 percent, significantly above its historical 10-year average of 3.4 percent. It is likely consumers are continuing to pay down debts incurred in the latest business cycle and strengthening their net worth as housing prices have declined considerably for many. Once these measurements of financial security are met and consumers feel confident in the economy's recovery, we are likely to see increased demand in consumer expenditures.

However, almost all measures of the consumer confidence index remain down from the prior year. Consumer confidence for December 2010 was reported at 52.5, a decline of 1.1 points from the same period in the prior year. Consumers' judgment of the present situation is slightly higher, posting a value of 23.5, or a 3.3-point increase over the 20.2 recorded in December 2009. Yet, assessing the future, consumers were less optimistic in December 2010, recording a value of 71.9, a 5.3-percent decline compared to the prior year. Positive movements are expected, but timing remains somewhat uncertain.

Consumers' expectations over the next six months may not be ideal but investors have shown increased optimism in the economy by driving equities markets up. While investors are also taking on risk and a long-term outlook, the stock markets are a leading indicator on the direction of the economy. The Dow Jones Industrial Average increased 11.6 percent, Standard & Poor's 500 Index gained 10.1 percent and the NASDAQ Composite Index expanded 16.1 percent over the last 12 months. While all three measurements are off from levels reached before the Great Recession, they are not far away from a full recovery considering the ground they made up. For example, the Dow Jones Industrial Average is approaching 12,000, significantly higher than the closing price of 6,547 it bottomed out at in March 2009.

Currently moving at a slower-than-expected pace, legislative moves in the latest quarter might increase the recovery's cadence by catapulting consumer spending, which accounts for nearly 70.3 percent of GDP. During December's lame-duck congressional session, President Obama reached a deal with Congress, preserving the Bush-era tax cuts for families across all income levels, extending emergency jobless benefits for another year and cutting the Social Security payroll tax by 2 percentage points through 2011. Add on college tax credits and other middle-class tax breaks that were set to expire within weeks, and the total package cost the taxpayers $900 billion over the next two years. Favorable or not, most of the money is likely to ripple throughout the economy, essentially acting like a stimulus, something needed with a labor market still reporting an unemployment rate of 9.0 percent. For the average joint tax return with a combined annual income of $70,000, approximately $1,400 will go back into the pockets of families, yet the debt overhang remains a concern.

With 39 states already facing a budget shortfall in fiscal year 2012, the budget gaps will likely grow if their allotment of federal dollars is reduced. That said, it is important to remember that government spending at the state and local level currently account for 11.3 percent of GDP, down $286.5 billion from a year ago. If state spending levels are further reduced to balance budgets, which is likely, it could potentially put considerable drag on the pace of recovery.

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September 2010

The third quarter of 2010 was the first in which the training wheels were removed from the nation's economic bicycle. Without the homebuyer tax credit, little stimulus dollars remaining from the American Recovery and Reinvestment Act, and most funds from the government's Troubled Asset Relief Program (TARP) returned with an overall cost estimated at $50 billion (less than one percent of the gross domestic product), the third quarter was a test of whether the economy could sustain itself in the wake of the Great Recession.

The United States' gross domestic product (GDP) or total economic output for the third quarter of 2010 (first advanced estimate) increased at an annual rate of 2.0 percent, up modestly from the 1.7 percent growth rate witnessed in the second quarter of 2010. Although the economy, by measurement of GDP, has been growing for five quarters, it is lacking the aggressive pace some might have expected following the severity of the latest downturn. In September, the National Bureau of Economic Research's Business Cycle Dating Committee officially determined "that a trough in business activity occurred in the U.S. economy in June 2009" highlighting that the Great Recession had been over for nearly 15 months. Yet, prior to and since the announcement, the Federal Reserve has been deliberating additional quantitative easing tactics in an effort to further stimulate the economy. Quantitative easing is a way for the Fed to credit themselves money and then use it to purchase long-term assets such as U.S. Treasury bonds. The hope is that purchasing these bonds would lower long-term interest rates on the open market, which in turn is designed to spur economic activity through cheaper credit. That said, Fed Chairman Ben Bernanke continues to indicate that he would use such tools to prevent the economy from fluttering into another recession and witnessing further declines in wages and prices; additional evidence suggests the majority of the Federal Reserve Board is in agreement on this policy.

Although methods to stimulate the economy can have both positive and negative effects, it often does not instill confidence among consumers. While the Fed has purchased $1.7 trillion in debt and securities in 2009, and the economy has come out of the recession and witnessed sustainable, albeit slow, growth, its effects on confidence in the overall economy has been minimal. In September, the Consumer Confidence Index recorded a decline of 9.2 percent, or 4.9 points compared to a year ago, falling to 48.5. Consumers' future expectations retreated further from 73.7 to 65.4, down 11.2 percent compared to 12 months ago. While the latest downward trend in consumer confidence may be partially blamed on the election cycle, as the index has a history of being lower before a midterm election, the fact that consumers feel worse today than they did a year ago is tough to ignore and will likely impact the ultimate recovery cycle.

Even as consumers illustrate their pessimism, the equities markets rebounded considerably in the third quarter, indicating investors are willing to take on more risk with the belief that a sustainable recovery will bring profits. The Dow Jones Industrial Average increased 11.6 percent, Standard & Poor's 500 Index gained 9.3 percent and the NASDAQ Composite Index expanded 13.3 percent over the last 12 months. While all three measurements are off from their latest peak in April, the upturn suggests the markets have more confidence and patience for a long-term recovery.

While each sector of the economy is performing differently, looking beyond current measures, there is no doubt that many state and local governments will have to reduce their services further while also increasing taxes in 2011. These measures may have profound effects on various areas' ability to rebound from the current economic stalemate they find themselves in, including Nevada. Additionally, many states were able to help fill past budget gaps with federal dollars provided by the American Recovery and Reinvestment Act. Looking ahead, much of the $140 billion in stimulus divvied out to states has already been spent and is not likely to recur.

As market indicators remain mixed with some degree of instability still present, it is expected that volatility will likely linger in the economy through the rest of the year. The lame-duck congressional session could also be pivotal in determining future policy, including the Bush-era tax cuts that are set to expire on December 31st, that could be instrumental in curing the uncertainty over the government's plan to jumpstart the economy while also ablating the debt levels.

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June 2010

While we have not shifted in reverse, there is no doubt that the national economy has begun applying pressure to the brakes of the economic engine we witnessed moving forward during the first three months of the year. The second quarter of 2010 can be summed up with the vehicular adage: proceed with caution.

The United States' gross domestic product (GDP) or total economic output for the first quarter of 2010 was revised from a 2.7 percent annual growth rate to 3.7 percent. Preliminary results for second quarter GDP reached 2.4 percent annualized. While total economic output continues to grow, the force at which it is growing is somewhat disappointing, especially after the recent depth of the recession. More concerning is that the federal stimulus efforts enacted during the recession are winding down, high unemployment remains, and further pullback in local and state government spending over the next several years may prevail. The National Association of State Budget Officers' Spring 2010 Fiscal Survey suggests that states still face $127.4 billion in budget gaps for the remainder of fiscal 2010 through fiscal year 2012. Like wearing a parachute while running, this expected drag and the increased taxes likely to be enacted will further slow down economic growth, as state and local government spending comprises nearly 12.3 percent of GDP.

The broad economic friction is tied to many less-than-stellar performances in housing, personal income and labor, to name a few, and is leading consumers, investors, and the Federal Reserve to also proceed with caution. Fallout came in June as The Conference Board's Consumer Confidence Index fell sharply, losing the momentum it had gained during the first two months of the second quarter. Consumer confidence now stands at 52.9, a level not much higher than the 49.3 witnessed 12 months ago. With the index being in the pits for so long, readings above 100 or at least closer to its 30-year average of 94.2 seem unattainable in the near future. The Present Situation Index at a paltry 25.5 is even more dire, given that the economy has survived the deepest recession since the Great Depression. The latest figure represents only a marginal increase above the 25.0 reported during the same period a year ago.

Investors also witnessed their portfolios deploy parachutes as major indices declined during the quarter. The Dow Jones Industrial Average shed 10.0 percent, Standard & Poor's 500 Index dropped 11.9 percent and the NASDAQ Composite Index lost 12.0 percent of its value. All three indices are now at levels not seen since early in the fourth quarter of 2009.

The Federal Reserve is not blind to the double-take in confidence witnessed among consumers and investors. Lately, their impression is also one where they have taken a step back in declaring a strong recovery and interest rate increases in the near term. In June, the Federal Open Markets Committee (FOMC) voted 9-1 in favor of maintaining the current federal funds rate - nearly zero - for the 13th consecutive vote. Ben Bernanke commented that "financial conditions have become less supportive of economic growth" and that economic recovery is "proceeding." With recovery slowing and simply limping forward, the concern can no longer be about inflation and controlling it during recovery. Recovery is coming to a halt and concerns about the implications of deflation have emerged with few monetary policies to thwart it.

The recession continues in critical sectors such as commercial real estate where values continue to fall. Delinquency rates on commercial real estate loans remain elevated, declining a trivial 12 basis points during the first quarter of 2010 (latest available data). The current delinquency rate of 8.6 percent stops a 15-month streak of increases, but the level still represents nearly five times the 10-year average (prior to the latest downturn) of 1.57 percent. High delinquency rates are likely to remain for at least the balance of 2010, but may carry for out several years. More importantly, elevated delinquency rates will continue to impede much of the commercial construction industry, which flourished during the latest boom period. It is expected to take a considerably longer amount of time for construction activity to recover, as it is still down 13.7 percent from a year ago.

For the remainder of the year, the national economy will likely grow at a slower pace. While additional stimulus could be warranted to assure that we do not experience a double-dip recession, there will be a slim chance it will occur prior to the mid-term elections in November. There is animosity toward new fiscal and monetary policy that will increase the national debt, especially after the capital market turmoil sourced to the euro debt crisis, which is still ongoing but toned down in recent weeks. This wait-and-see approach may not bring a double-dip but it will also not cause unintended acceleration in the economy.

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March 2010

The first quarter of 2010 included some bright spots as several indicators suggested the health of the United States economy is improving. While our economic wellbeing will continue to be monitored, conditions have stabilized in selected areas, and we are beginning to move into a long-term period of rehabilitation.

The advanced estimate for first quarter of 2010 suggests gross domestic product (GDP) rose at an annual rate of 3.2 percent, largely stemming from additional personal expenditures, exports and nonresidential fixed investment. The latest figure represents a decline from the annual rate of 5.6 percent in the previous quarter (Q4 2009). Nevertheless, the current estimate still reflects significant strength across a broad base of sectors with the deceleration in GDP sourced to declines in state and local government spending and an increase in imports, (imports are calculation reduction to GDP because the goods consumed are not created in the United States).

During the first quarter of the year, United States' equities markets rebounded to levels not seen in nearly 18 months. The Dow Jones Industrial Average increased 27.5 percent, the S&P 500 gained 34.0 percent, and the NASDAQ Composite expanded 56.7 percent. Concern among several Eurozone nations laden with debt, including Greece, Portugal and Spain, remains as global investors weigh the potential of a $1-trillion Euro-back bailout. Not immune to financial outcomes overseas, the U.S. markets have been led largely by encouraging growth in manufacturing, a sector considered one of the leading indicators in our consumption-based economy. The sector is broadly reported on in the Institute for Supply Management's monthly index, which, by the end of March, had witnessed expansion for the eighth consecutive month and was approaching a six-year high. While initial gains may have been attributed to the rebuilding of inventories that took nearly two years to diminish, the sustained trend seems to have real sustenance, and could push higher as consumers become more confident.

One year ago the Consumer Confidence Index reported its lowest level in history (25.3), but like a ninth-round Rocky Balboa, it has slowly edged back to end the first quarter of 2010 at 52.3. While it did lose significant ground in February, dropping nearly 10 points and to a 10-month low, it is important to note that consumer sentiment can be very fickle and can be attributed to anything from the snowy weather across the U.S. to health care debates in Congress. Despite the drop, the index has rebounded 94.4 percent in the last twelve months. It has a long way to go before reaching a pre-recession level of 90.6, but the fact remains that economic confidence was on an upward trend long before job growth was reported in March; a sign consumers are at least feeling better about where the economy is going today.

Dominating the economic news during the quarter was the first considerable sign of job growth. The Bureau of Labor Statistics reported an increase of 162,000 in nonfarm payroll employment for March, the largest gain in employment since March 2007. Critics suggest temporary hires from the Census Bureau skewed the gain, but excluding the 48,000 temporary workers hired to help conduct the decennial census, the workforce still increased significantly. The largest gains in the labor market came from temporary help (+40,000), health care (+27,000) and manufacturing (+17,000).

While even lagging economic indicators like jobs are starting to see the light, there remains a gap in the banking sector. Of the 8,012 FDIC-member institutions, 34.8 percent were unprofitable in 2009, or 41.5 percent of commercial lenders, which comprises the largest concentration of banks. Looking forward, the FDIC has 702 problem institutions on its books, the highest since 1993 and it has estimated that bank failures this year may peak above the 140 that failed last year. A fact not so hard to dispute given elevated default rates remain and the industry's loan loss reserves are now at 3.12 percent of total loans and leases, the highest level since the conception of the FDIC. By contrast, the quick repayment of taxpayers' dollars distributed by the Treasury Department's Troubled Asset Relief Program (TARP) may best define the pace of recovery by private businesses, especially in the financial sector. In an effort to stabilize the banking industry during the depth of the recession, $245 billion was credited at a projected cost of $76 billion. At quarter-end, the Treasury estimates that the taxpayer dollars may now turn a profit as $181 billion has already been repaid, with $14 billion in interest and dividends. Several outstanding borrowers include Freddie Mac, Fannie Mae and AIG, which may take years to repay in full but the resiliency of many businesses to repay their "bailout" loans within a year is nothing short of compelling.

On a go-forward basis, rehabilitation is going to be most difficult for the spending arms of government. The sector will likely face tough decisions on how to balance or adjust historic levels of services and entitlements with a significant decline in revenues (taxes). The Congressional Budget Office reported at the end of the quarter that the federal debt would rise to 90 percent of our nation's output (GDP) by 2020, not far off from our historic high of 109 percent at the end of World War II. The ability to recover from the economic crisis at lower debt levels will be our challenge in the years ahead.

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