US economic overview - January 26, 2007

General: After a very strong start in early 2006, the US economy gradually slowed down exactly as the US Federal Reserve Board wanted it to do. In the process, the economy absorbed rising energy costs and coped with a dramatic downturn in residential housing. The outlook for 2007 is not bad. We won't be seeing an annual growth rate of over five percent as we saw in Q1 2006, but the goal is for a steady growth rate of around three percent. The Chairman of the Federal Reserve, Ben Bernanke, admonished the newly inaugurated US Congress to take the first steps to control the ever-rising entitlement spending on Social Security (pensions), Medicare (for retirees) and Medicaid (for indigent people). If no corrections are taken, the entire US federal budget will go to these entitlements by the year 2050. Mr. Bernanke termed this trend the “debt spiral”. The private sector faces similar problems. GDP: + 2.0% in Q3 2006 - estimates for the year are at around + 3.0% Consumer Prices: + 0.5% in December - higher than expected. Core inflation (without food and energy) was 0.2% in December. For the year, consumer prices went up 2.5% (3.4% in 2005), while core inflation was 2.6%. Industrial Production: + 0.4% in December 2006. November was revised to - 0.1% after final data showed weaknesses in some industries, particularly steel. The capacity utilization was 81.8% in December, while factory output rose 0.7%. For the year, industrial output grew by 3.0% over 2005. Orders for Durable Goods increased 3.1% in December. Housing: Housing starts in December rose 4.5% over November but were 24.3% below the numbers for December 2005. An estimated 1,800,700 units were started in 2006 compared to 2,068,300 in 2005 - a drop of 12.9%. Building permits in December rose 5.5% over November. Overall, the residential market is still soft, but commercial building remains strong. Unemployment: 4.5% in December 2006; 167,000 jobs were added to the payrolls in December, an unexpectedly high number. Retail Sales: Went up a strong 0.9% in December. Even car sales jumped 0.3%, but at the cost of steep discounts. Trade Balance: - $837.2 billion as of November for latest 12 months Current Account Balance: - $880.3 billion as of Q3 for latest 12 months. In December, the federal government had a budget surplus of $44.54 billion, and for the year, the budget deficit is $248.2 billion or 22% less than 2005. 2006 is the second year in a row to see a shrinking deficit. Steel Production: 98.5 million mt of crude steel were produced in 2006 (94.9 in 2005). In comparison, China produced 418.8 million mt -- more than Japan (# 2), the US (#3), Russia (#4), Korea (#5) and Germany (#6) combined. Vehicle Production: 771,272 units were produced in December 2006, 6.4% less than in December of the previous year. In 2006, 11,263,986 units were produced - 5.7% behind last year's pace. Ford lost a heart-stopping $5.8 billion in Q4 2006 and $12.7 billion for the year. It is not only lagging sales that are besetting Ford, but also the increasing legacy costs. Expenditure is mounting for company-sponsored health and pension benefits covering retired employees who vastly outnumber the current trimmed down workforce. GM has delayed its Q4 results in order to correct reporting errors for the last five years.