Economic Outlook

Investments

Moody’s Economy.com predicts a 1.1% drop in investment Gross Domestic Product (GDP), over a 2.9% drop in 2007. Given the recent sub-prime mortgage debacle and similar collaterized debt in the corporate market, the 1.1% drop is understated given the tightness in corporate lending and the government's short term stimulus package. The stock market dropped in tandem with recent events over the past few weeks including a one day 309 point drop in the Dow Jones Industrial Average. Non-Residential, Inventory Change, and Residential are the key indicators for the $1.8 Trillion annual business investment (15% of US GDP) and implications upon the economy.

Nonresidential

The Philadelphia Federal Reserve’s Business Outlook Survey for the month of January came in at -20.9, it’s lowest number since October 2001(median of 0 versus 50 for PMI) 1. The index is closely watched in terms of early delivery and blend of manufacturing and business sectors and if a large percentage change occurs investors correlate similar changes to the PMI. The Dow Jones Industrial Average dropped 306 points on January 17, 2008 after the publishing of this report as investors concerns about growth weighed heavily on the market. On the other hand, the PMI for January came in at 50.7%, close to the 6 month average of 50.2%. (The following should be in consumption side?) U.S. service sector contracted in January for the first time since March 2003 coming in at 41.9, from 54.4 for December -- far lower than the forecast 52.5. Any reading below 50 indicates contraction. The ISM data have "recession written all over it," said Jim Paulsen, chief investment strategist at Wells Capital Management. "It's not that it's weak. It's a complete collapse in the number, one of the lowest readings this statistic has ever had." 2 The non-manufacturing ISM reported a reading a 44.6 for January. Non-manufacturing business contracted for the first time since March 2003, the ISM said, and components of the index were as bad if not worse — new orders contracted for the first time since October 2001, and employment contracted for the first time since February 2002.3

The fallout of the sub-prime mortgage debacle has had a similar effect on corporate loans used to finance giant buyouts.