Our Analysis and Outlook:

Virtually all significant economic indicators were trending negative at the end of 2007. Housing had collapsed, unemployment went up and inflation ratcheted up due to higher energy and food costs. Given all that and the stock market turmoil since year end, it’s easy to forget that 2007 was a pretty good year overall. Among the positives from last year: our economy generated approximately 1.5 million new jobs; GDP growth was about 2.2% and worldwide GDP grew by 3.9%; interest rates declined and inflation remained mostly in check. Equity markets posted gains for the year and P/E multiples remained at historically moderate levels.

But who cares about 2007? That’s ancient history. Since October and especially since year end, the financial markets have finally begun to reflect the impact of the credit market’s problems and the belief that we are already in or about to be in a recession. What’s the outlook?

GDP growth is certainly decelerating and there is probably a 50/50 chance of an official recession. Aggressive interest rate cuts and the upcoming fiscal stimulus package will mitigate the recessionary forces but it is not at all clear that they will prevent recession. It may be too late. GDP growth in the 4th quarter was an anemic .6% on an annualized basis. (There is not enough space here to debate the pros and cons of the stimulus package but there are many questions…..) Inflation should remain manageable although there is definitely more inflation risk now than there has been in years.

Our view is that after a shake-out in the first half , the domestic economy should be poised to resume more normal, modest growth by no later than the last part of this year, perhaps even earlier. Having said that, it is difficult to see the residential housing market recovering prior to 2009. Please read our thoughts on the impact of these economic conditions on the investment outlook in our separate article.

© 2008 Childs Company