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The Tally Ho

Friday, February 25, 2005

Economic Data and Forecast 2005

Gross Domestic Product[1]

Overview

Gross Domestic Product (GDP), value of all goods and services produced in the United States, rose in 2004 by 4.4% from its 2003 level. This is heralded by many as a substantial achievement as GDP grew by only .08% between 2000 and 2001, following the “bursting of the tech bubble” and 9/11, but has grown by 1.9% in 2002, 3.0% in 2003, and now 4.4% in 2004.

The key drivers of GDP growth in 2004 were personal consumption expenditures (CPE), the largest sector of GDP (70% of GDP in 2004), which increased 3.8%, equipment and software purchases, which increased 13.4%, exports, which despite being offset by imports, increased 8.1%, residential fixed investment, which increased 9.5%, and Federal Government spending, which increased 4.7%.

Interesting to note in the state of the economy is the continued importance of CPE as a component of GDP although it decreased in importance from 70.6% in 2003 to 70.2% in 2004. Also important to note are the changes in exports and government spending. While export values increased in 2004 by a rate of 8.1%, imports also continue to grow by 9.8%, thus continuing to be a GDP deflator by 1.7%. Additionally, government spending has increased in total value each year but has been increasing at a decreasing rate as it increased by 4.4% in 2002, 2.8% in 2003, and 2.0% in 2004. It has also been decreasing its impact on GDP growth during this period.

GDP by Sector

As mentioned previously, CPE continued to increase at significant rates in 2004. Among the components of CPE, durable goods produced the largest gains at 6.8% from 2003 levels, while produced at significant 4.5% increase, and services produced a more average 2.8% increase.

Gross private domestic investment showed the largest gains of any sector in 2004 as it grew 12.9% from 2003 levels. This was provided by the substantial increases in equipment and software expenditures as well as increases in residential housing. Non-residential structures grew by only 1% in 2004.

Net exports and imports proved to be interesting in its production of GDP in 2004. While exports grew by their highest rate in four years at 8.1%, powered by increased exports of both goods and services, imports also grew by their highest rate in four years at 9.8%, fueled by increased goods imports. Thus, net exports continue to have a negative impact on GDP despite recent growth in exports.

Government spending continued to increase in 2004. However, government spending increased by just 2.0% in 2004—the smallest increase since 1998. Of particular importance in this figure are the only marginal increases in state spending at .4%--its lowest in more than 20 years—while federal spending continues to increase with continued emphasis on growth in defense spending while domestic non-defense spending decreased by 0.5%--the first non-defense spending decrease since 1996.

GDP by Industry (2003)

In 2003, services-producing industries grew by 3.2% while goods-producing industries grew by 2.8%. While both of these levels are below average GDP growth rates from between 1995 to 2000, a further breakdown reveals which industries are performing better in the post 9/11 economy.

The largest industry growth rate in 2003 was in durable goods manufacturing, with this industry growing at 6.1%. Creating this significant growth in 2003 was computers and electronics, which posted 28.8% growth in 2003. Also leading durable goods growth was automobiles, with a much more modest, but significant, 8.9% growth. Behind durable goods, utilities grew by 5.9% in 2003. Also among the industry growth leaders in 2003 were information at 5.7%, retail trade at 5.6%, and agriculture, forestry, fishing, and hunting at 5.5%.

Industries continuing to experience significant struggles in 2003 were mining, which experienced at 7% decrease, and wholesale trade, which experienced a 1.9% decrease during the year. While other industries are underperforming their previous levels of growth, it is essential to note the generally positive direction of GDP growth by industry.

Stock Markets[2]

Dow Jones Industrial Average

The chart below tracks the DJIA movements over the last five years.

(Blogger cannot handle charts or Excel tables...for chart go to http://finance.yahoo.com then click on DJIA, 5y)


Here it is important to note significant changes in the market’s levels. The market peaked in December of 1999 at 11497 composite. Subsequently, the market began to adjust during the economic slowdowns in late 2000 and into 2001 until 9/11 brought significant uncertainty to the market and the sharp decrease in the third and fourth quarters of 2001. However, as nervousness subsided and the market recovered, the onset of war, the continuation of war, accounting scandals, and general economic slowdown led the market to a trough in late 2002 and early 2003 at 7891 points. Since that time, economic results have been strong due to fiscal, monetary, and global policies in recent years. Currently, the index rests at 10796, just 700 points below its peak, with reasonably stable performance throughout 2004 and gentle climbs and apparent leveling in late 2004 and early 2005 following presidential elections and elections in Iraq—both said to have significant impacts on the market.

Nasdaq

The chart below tracks the Nasdaq market index over the last five years.

(Again, http://finance.yahoo.com Nasdaq, 5y)

In 2000, the Nasdaq was reaching record highs on the tail of the tech boom. However, as 2000 progressed, the overvalued tech stocks that had been driving gains in Nasdaq began to be adjusted downward by the market and the composite steadily declined until 2001, where, again, the effects of 9/11 can be seen in a third quarter fall and subsequent fourth quarter readjustment. However, in 2002, the market continued to fall and bottomed at just over 1170 points in September. Since that time, the Nasdaq has regained some of its strength amidst the growing economy and increased tech spending in 2003 and 2004. However, the market rests steady for the last 13 months at around 2000 points—well below its peak near 5000 point in the year 2000—and currently rests at 2076 points in the composite.
Money Supply and Financial Condition

Interest Rates

In consideration of interest rates, this analysis will focus on money market rates as produced by the 3-month LIBOR rate, 3-month U.S. Treasury Bill rates, 20-year U.S. Treasury Bond rates, and 20-year A grade corporate bond rates.

In February of 2004, the 3-month LIBOR rate was quoted at 1.35% and, in February of 2005, at 2.77%.[3] This international measure of money markets expresses the rate at which financial institutions borrow from one another and has more than doubled in the last 12 months.

The 3-month U.S. Treasury Bill is currently trading at 2.4%. A year ago, in February of 2004, the 3-month T-Bill traded at 0.93%--a substantial increase in T-Bill rates as the rate has increased by 258% in the last 12 months.[4]

Unlike the rates previously discussed, the 20-year U.S. Treasury Bond has experienced a downward rate movement between February of 2004 and February of 2005. Current 20-year T-Bonds are quoted at 4.54% compared to 5.00% a year ago.[5]

20-year A grade corporate bonds have also experienced downward pressure on interest rates. In February of 2004 the 20-year corporate bond rate was 5.68%. 20-year corporate bonds are currently trading at 5.47%.[6]

Money Supply and Inflation

Over the past 12 months, the money supply has increased by 345 points—a relatively substantial amount of growth—from 6,114 in 2004 to 6,459 in 2005. Also, the money supply grew 48 points in January of 2005—suggesting that the money supply is growing at an increased rate in 2005 and may produce an increase of as much as 576 points in 2005.

The Consumer Price Index (CPI), the leading indicator of inflation has also been increasing in recent history. At the end of 2003, the CPI stood at 184.0 after experiencing an inflationary increase of 1.9% during the year. At the end of 2004, CPI measured 188.9, an increase of 3.3% during the year. Thus, the economy is experiencing inflation at an increasing rate.[7]

Global Economic Performance[8]

OECD GDP

Within the OECD, GDP growth generally remained between 2% and 4%, with 6 countries, mostly Western European, growing at less than 2% while 4 countries grew at rates greater than 4% with Turkey growing quickest at 9.8% in 2004. Note: China and many Asian countries are excluded from the OECD.

Interest Rates

Interest rates throughout the OECD are quite varied. Short-term rates within the EU are set at 2.1%, while the majority of the OECD members’ rates range between 2% and 7%. Meanwhile, countries such as Hungary and Turkey have exceptionally high short-term rates at 11.5% and 22%, respectively, in 2004. Long-term rates vary on a much smaller range. Euro area rates average 4.1% while the rest of the OECD ranges between 4.2% and 6%, with Turkey again showing the largest exception at 24%.

Inflation Rates

Inflation rates around the world appear to be relatively stable. EU inflation is set at 2.1% as much of the rest of the OECD experienced inflation between 2% and 4% in 2004. Exceptions to average inflation rates were Hungary, 6.9%, the Slovak Republic, 7.7%, and Turkey, 10.7%.

OECD GDP Projections for 2005

The OECD issued GDP projections for its member countries for 2005. On average the OECD is expected to generate GDP growth of 2.9% in 2005, while the EU is projected to grow at 1.9%, and the US at 3.3%. Leading the OECD in GDP growth for 2005 are Ireland, Iceland, and Turkey.

Exchange Rate Forecasts

The OECD is forecasting its members’ currencies to appreciate against the dollar in 2005. The Great Britain Pound is expected to gain on the dollar by $.01 while the Euro is anticipated to appreciate against the dollar by $.03. While this is minor value depreciation for the dollar comparative to previous years, it is significant as every currency in the OECD continues to appreciate against the dollar in 2005.

Leading and Coincident Indicators[9]

Summary of Movements of Leading Indicators

During the second half of 2004, the leading indicator index continued its downward trend that began near the beginning of 2004. However, this was diagnosed by The Conference Board as “a pause in the rising trend” that began in March 2003. November and December each brought increases in the composite index, signaling a positive outlook. A breakdown of the index reveals that four indicators produced positive results in December. These were: consumer expectations, stock prices, money supply, and unemployment (inverted). The remaining indicators produced negative results with the exception of hours of production, which remained constant.

Please find the leading indicators and select graphics from 2004 listed below:

(Charts and Spreadsheets available at the Conference Board)

Summary of Movement of Coincident Indicators

In December of 2004 all four coincident indicators showed positive motion as industrial production, non-agricultural payrolls, personal income, and manufacturing and trade sales all increased. This is consistent with their positive movement throughout the second half of 2004—with a 1.2% increase during the six month period. The positive indication given by the coincident indicators suggest that the economy is functioning well in the immediate term. Additionally, many of the data previously discussed supports this assertion.

The Figures on the following page outline Leading Index, Coincident Index, and Lagging Index movements over time.
Other Indicators

CEO Confidence Survey

Each quarter, The Conference Board conducts and publishes the CEO Confidence Survey, which serves to evaluate the views and outlook of 100 CEOs across various industries.

The fourth quarter survey produced a positive outlook, with a score of 61 points, when scores above 50 are generally considered positive. However, this is down from the third quarter survey, which produced a score of 63 points. Lynn Franco, director of The Conference Board’s Consumer Research Center says, “CEO confidence has now slipped for three consecutive quarters…However, expectations are that the economy will continue to grow in 2005, just not as fast as it did in the first half of 2004.”

Consistently, when asked about current conditions, short-term future conditions, and industry expectations for their industries, CEOs produced positive, yet tempered, expectations for 2005—only half of those surveyed expressed opinions that economic conditions would improve in coming months. As CEOs are responsible for influential strategic decisions, the CEO Confidence Survey may serve as a good indicator of economic development in future periods.[10]

Merger Activity

Although not often discussed as an economic indicator, merger and acquisition transactions are usually a bullish activity—at least they were in the last economic cycle. During the bullish outlook and subsequently booming stock market, M&A transaction counts and values soared—increasing each year from 1991 to 1998—thus, effectively creating large merger waves before the economic and market growth that would come. Interestingly, M&A activity also indicated the recession that would follow as transaction rates fell in 1999 and 2000 before reaching lows in 2001.

If this is not an anomaly, as is relatively unlikely, merger activity should be a leading indicator for future market performance in the short-term—1 to 2 years. As such, it is important to note that deal volume and size again began to pick up in 2003 and continued throughout 2004. Now, a new wave of mega-deals are sweeping the markets as P&G buys Gillette, SBC buys ATT, Verizon buys MCI, and more as growth and consolidation continues to occur in telecom, financial services, consumer goods, and other industries.[11]
Existing Forecasts

Typically, there is much dispute and debate over economic outlooks and forecasts for the coming year. However, an examination of six forecasts from diverse sources—ranging from governments to independent organizations to commercial forecasts—reveals amazingly consistent data.

RSQE

The Research Seminar in Quantitative Economics (RSQE) at the University of Michigan projects GDP growth of 3.7% for 2005, with a CPI of 2.5, a T-Bill rate of 2.8%, a T-Bond rate of 4.8%, and a -7% dollar depreciation in the world market. The RSQE forecast is founded on continued consumer spending, dollar depreciation, parallel growth by partner economies, and decreasing oil prices predicted for 2005.[12]

OECD

The OECD published only a brief forecast for the United States for 2005. It forecasts GDP for 2005 at 3.3% based on decreasing energy prices, continued production efficiency, supportive monetary policy, and low core inflation.[13]

Federal Reserve

The Federal Reserve polled 34 analysts to determine its forecasts for 2005. It is projecting GDP at 3.5%, CPI at 2.0, T-Bill rates at 2.7%, and T-Bond rates at 4.8%, citing a cooling, but steadily growing economy with reasonable inflation rates and steady, but climbing interest rates. However, the projections from the Fed are an average, with 18% predicting GDP between 2.0 and 3.0, 46% between 3.0 and 4.0, and 21% between 4.0 and 5.0 for 2005.[14]

Wachovia

For 2005, Wachovia, a private institution, is forecasting GDP of 3.2%, CPI of 2.3%, T-Bill rates of 3.34%, T-Bond rates of 4.74%, and unemployment of 5.3%, citing continued consumption, income growth, moderate inflation, and continued levels of investment as well as depreciating dollar values and government spending to support consistent, average GDP growth.[15]

Briefing.com

Briefing.com, a market analysis website, has also issued its own economic forecasts for 2005. It is forecasting GDP at 3.5%, an S&P 500 gain of 5%, a T-Bond rate of 5%, and a CPI of 2%-2.5%. The bases for its forecasts are strong economic fundamentals, average growth rates, moderate inflation due to energy prices, and slowing corporate earnings growth.[16]

Congressional Budget Office

The Congressional Budget Office, or CBO, is projecting more optimistic economic figures than most others, with GDP at 3.8%, CPI at 2.4, Unemployment at 5.2%, T-Bill rates at 2.8%, and T-Bond rates at 4.8%.[17]

Summary of Forecasts

Based on the forecasts presented, analysts’ opinions on GDP remain within a rather tight grouping. GDP is consistently forecast to underperform 2004 and is instead expected to grow at a rate between 3.2% and 3.8%. As this consensus originates from a wide variety of analysts and sources, it is fair to conclude that it is representative of general analyst sentiment for the 2005 economic outlook. Also important to note in this section is the tight grouping of CPI forecasts, which range from 2.0 to 2.5, and play an important role in each economic forecast in determining performance in 2005. Equally interesting is the relative level of stability of interest rates predicted. There is very little variance in forecasts for either T-Bills or T-Bonds. Finally, economic performance is said to be consistent, steady, and on-average in all forecasts studied. This shows a more stable economic situation, albeit moderate, than any year in nearly a decade.


Analysis and Economic Forecast

GDP

Real Gross Domestic Product can be forecast at a growth rate of 3.3% for 2005. On a macroeconomic trend level, GDP grew at an average rate of 3.14% from 1970-2004. While 2004 produced above-average GDP growth at 4.4%, it cannot be reasonably forecast that this is sustainable. As seen in other economic forecasts, GDP is expected to settle closer to average growth rates.

When considering factors to predict results for 2005’s economic performance, it is essential to approach the forecast from multiple perspectives. The perspectives valued in this analysis are: the stock market approach, the financial conditions approach, the global economics approach, and the cyclical indicator approach. These perspectives are then compared to other analysts’ forecasts for consistency.

The Stock Market Approach

From an examination of the stock market trend line for the DJIA and the S&P 500, a clear leveling can be seen beginning in January of 2004. Since that time, the stock market has been relatively flat, with only minor fluctuations between 10,000 and 11,000 points. While the fourth quarter of 2004 produced a slight upward trend, I associate a large portion of this to the removal of uncertainty regarding United States presidential elections and the future of U.S. economic policy for the next election term.

The leveling of the stock market is significant as the stock markets are known to be a leading indicator for the macro economy and GDP. The flat trend line, with slight fluctuations and cumulative growth, indicates that the economy is preparing for a year of more certainty and stability—thus suggesting an average GDP growth rate. Additionally, the market currently rests at 10,796—a mere 700 points below its peak level in December of 1999. This suggests that the market has reached a point close to capacity barring a revolutionary innovation—such as the technology boom of the 1990s—to create new capacity for growth and added value. Without this, I predict the market to remain steady with few winners and losers and average gains of approximately 5.5% on the S&P 500—translating to average GDP growth for 2005.

The Financial Conditions Approach

The analysis of GDP growth potential through the financial conditions approach entails a focus on the growth of the money supply, interest rates, and the rate of inflation. The money supply is currently growing at an increasing rate. The point change predicted for 2005, 576 points, exceeds the 345 point increase experienced in 2004. Growth in the money supply is consistently linked to subsequent economic expansions; typically after an 8 month lag. Given this, and a growing money supply in the last two years as well as a projected growth for 2005, the money supply element of the financial conditions approach suggest a period of economic expansion for 2005.

Also indispensable to the financial conditions analysis is the consideration of interest rates and rates of inflation. As seen in the data overview of financial conditions, short-term interest rates experienced drastic increases in 2004 as the LIBOR increased to 2.77% from 1.35% and T-bill rates increased to 2.4% from 0.93%. However, during the same period, long-term rates for both government debt and corporate bonds have fallen slightly. This suggests that it is not inflationary pressure that is increasing interest rates, but rather an adjustment to a more traditional economy as it emerged from a recession. While the economy has been experiencing inflation at an increasing rate (up to 3.3% last year compared to 1.9% in 2003), it is being moderated by tightened fiscal policy and realistic market expectations.

The financial conditions index, first developed by Goldman Sachs, measures monetary variables from a weighted-average index perspective that considers LIBOR, corporate bond rates, the trade-weighted dollar index, and the equity market capitalization to GDP ratio. Changes in the FCI correspond to subsequent changes in real GDP. A 1 point decrease in FCI produces a 1% increase in real GDP. The above data were used to calculate an estimated change in FCI between 2004 and 2005 based on available information. The calculation showed a 2 point decrease in FCI, which translates to a 2% increase in real GDP. While this estimate is more conservative than my forecasted position, it does not fully consider other elements of the economy and largely neglects some elements of the money supply. However, it does serve to make this forecast more conservative than other published forecasts.

The Global Economics Approach

The global economics approach focuses on the interplay among economies around the world. For the purposes of this analysis, economic data was gathered for OECD member countries. This analysis yielded global economic conditions very similar to that of the United States. The majority of OECD countries are experiencing GDP growth between 2% and 4%, with some of Western Europe below 2% and some of Eastern Europe above 4%. This places much of the rest of the world in the same growth pattern as the U.S. Second within the global analysis, interest rate conditions are very similar to that of the U.S., with short-term rates between 2% and 7% and long-term rates between 4% and 6%. While short-term rates show more variance than the U.S. and the EU, it is once again due to the emerging, and somewhat unstable, emerging economies in Eastern Europe. Similar to GDP rates and interest rates, OECD inflation rate are also comparable to U.S. rates of inflation, with the majority of countries experiencing inflation rates between 2.1% and 4% compared to the U.S.’s current 3.3% and projected 2.25%.

Together, these international data combine to form a global economic picture that mirrors current and forecasted U.S. economic conditions. The OECD GDP composite is anticipated to grow at 2.9% for next year, which aligns to the forecasted U.S. GDP growth of 3.3% as much of the European Union’s GDP growth falls below 2%, thus lowering the OECD composite. Also helping improve the U.S. forecast is the continued depreciation of the dollar against every currency in the OECD group of nations. This, too, will boost U.S. GDP projections above OECD averages as the export sector of the U.S. economy continues to increase. The OECD conditions and projections validate the reasonableness of the forecasted U.S. GDP projection.

The Cyclical Indicator Approach

The cyclical indicator approach examines various economic data and factors that have been shown to predict with reasonable accuracy cyclical economic trends over time. The examination of the most recent indicators showed mixed results as only four of the ten indicators showed positive trends in the fourth quarter of 2004. However, while the data is mixed, the outcome is generally positive and indicative of a moderate economic period. First, the coincidental indicators support the assertion that the economy is currently strong and functioning well in the immediate term. This provides a strong basis to enter 2005.

Additionally, the indicators showing positive gains traditionally have long lead times to peaks. Unemployment, which decreased by 18 points in the fourth quarter, has a 12 month lead time, the stock index, which increased by more than 80 points between October and December, has an 8.5 month lead, the money supply, which increased by nearly 40 points in the fourth quarter, has a 10 month lead, and consumer expectations, which increased 7 points between October and December, have a 14 month lead. Together, these combine to take the potential for moderate, but positive, economic growth well into 2006. Also in support of this assertion is the cumulative value of the index, which despite a majority of negative trend indicators, is producing a positive index value that climbed in the fourth quarter of 2004. Together, a strong coincident indicator, suggesting a strong initial economy, and a moderate, but increasing, leading indicator index suggests that the economy is ready for average to above-average growth. The suggested GDP forecast of 3.3% directly coincides with this indicator series.

Other Indicators

As discussed in the “other indicators” section of the data presentation, other, non-traditional data may be considered indicators as well as the generally accepted analyses outlined above. This forecast focuses on two such alternate indicators. The first of which is CEO expectations. The results of the CEO expectations survey helped to moderate the overall GDP projection as it expressed significant conservative and hesitation among the country’s top business leaders. While positive, it, too, anticipates moderation and average growth and performance. Not only does it support the current GDP forecast, but it serves to influence GDP projection in a more moderate light.

Working to the opposite effect is the use of merger activity as an economic indicator. The size and volume of recent merger activity suggests that perhaps the market and the economy is more bullish than current predictions. This serves to influence a bit of optimism in projections. However, the use of merger activity as an indicator currently has weak statistical value and must be used much like an opinion survey until more data become available.

Conclusions on GDP

The GDP forecast of 3.3% outlined in this section aligns with all four forecasting approaches and analyses. It produces a strong, yet average and stable outlook for the economy that mixes growth with realistic expectations, moderate financial conditions, a parallel global marketplace, and generally positive indicators in addition to a strong economy coming off of a large year of GDP growth. Furthermore, the forecast outlined here aligns well with other forecasts of its kind from professional analysts from varying organizations around the world.

Consumer Price Index and Interest Rates

The Consumer Price Index as a measure of inflation can be reasonably forecast at 2.25 for 2005. First, after emerging from an inflationary year and strong economic results, fiscal policy can be anticipated to work to moderate inflationary tendencies. This can be seen in moderately increasingly short-term rates from the Fed while long-term rates continue to decrease—thus indicating that interest rate and inflationary pressure is moderate in the intermediate and long term. In an attempt to seek a balance between 2004 and 2003, the CPI should settle around 2.25 by year end.

Additionally, due to the close relationship between inflation and interest rates, the factors regarding inflation are influential in forecasting interest rates for 2005. Due to the projected economic stabilization, a slightly stiffer fiscal policy, and a goal of moderating inflation, T-bill rates and T-bond rates should be expected to remain stable throughout 2005 with only minor increases. Continued fiscal conservatism should provide moderate, but steady short-term rate increases—possibly as much as 0.4% to reach a rate of 2.8% by year-end. Similar to T-bills, T-bonds can be expected to increase rates to a median between the rate of 5.0% in 2003 and 4.54% in 2004. As fiscal policy gradually raises short-term rates and the economy grows at a steady pace, long-term rates can be reasonably forecast to move slightly upward and settle around 4.7% by the close of 2005.

Unemployment

Current unemployment rests at 5.4% percent. As economic growth is forecasted to be moderate, this rate can be expected to decrease. However, unless economic breakthroughs as mentioned in the Stock Market Approach occur, drastic changes in unemployment are unexpected. Nevertheless, unemployment is anticipated to decrease approximately 2 points to 5.2% in 2005.

Economic Forecast Summary

GDP 3.3%
S&P 500 5.5%
CPI 2.25
T-Bill 2.8%
T-Bond 4.7%
Unemployment 5.2%

Industries to Watch in 2005

Based upon the GDP projections, Stock Market assertions, and financial conditions outlined above, I suggest the following industries:

1) Financial Services—This industry had been consolidating over the last decade and was among the first to revive itself in 2002-2004. Look for increasing efficiencies and increasing consulting and information services.

2) Electronics Manufacturing—Increasing personal income levels, increasing business spending are driving this market. It posted large gains in 2004 and I anticipate it to continue these gains in 2005 as technology becomes increasingly essential and business tech budgets expand once again.

3) Hospitals and Nursing Care Facilities—Rising healthcare needs are increasing costs and revenues for this industry. I anticipate growth both in 2005 and in the long term as the country’s population continues to age and healthcare rates continue to climb.

4) Food Services—As disposable income continues to rise, so will the rebound of food services and drinking establishments. With American savings rates at nearly zero, look for recreational activities such as restaurants and bars to make a comeback.

5) Telecommunication—While competition is becoming incredibly fierce in the telecom industry—particularly in wireless services—deregulation and consolidation are paving the way for value-added services that could monopolize the emerging conglomerates’ efficiencies and returns.

6) Chemicals—Quietly consolidating, the chemical industry is poised to grow as it continues innovation in manufacturing techniques, raw materials, and possibly energy sources of the future.

7) Air Transportation—While experiencing bloodletting and bankruptcies, the airline industry may benefit from cheap sell-offs and asset purchases as well as new management theories for maintaining routes and pricing as well as lowered costs from newer, more fuel-efficient planes.

[1] All GDP data is taken from the Bureau of Economic Analysis and is available at www.bea.gov.
[2] All data are taken from http://finance.yahoo.com
[3] www.bba.org
[4] http://able.harvard.edu/rates/ca004q/, http://finance.yahoo.com
[5] http://www.federalreserve.gov/releases/h15/data/b/tcm20y.txt
[6] www.mellon.com, http://finance.yahoo.com
[7] Consumer Price Index. U.S. Department of Labor. 1/19/2005
[8] Global Economic Data taken from the OECD at Source: Groningen Growth and Development Centre and The Conference Board, Total Economy Database, January 2005, http://www.ggdc.net/)
[9] The Conference Board U.S. Business Cycle Indicators, 1/20/2005
[10] http://www.conference-board.org/economics/indicatorsExpectations.cfm
[11] Keough, Jack. “Merger activity to rise in 2003.” Industrial Distribution. Feb 2003, Sikora, Martin. “M&A volume in the 90s” Mergers and Acquisitions. Feb 2000.
[12] “U.S. Economic Outlook for 2005 and 2006.” RSQE, University of Michigan. www.umich.edu/~rsqe
[13] “OECD Economic Outlook No. 76”
[14] “Fourth Quarter 2004” Federal Reserve. November 22, 2004
[15] “Monthly Economic Outlook”. Wachovia. January 14, 2005
[16] www.briefing.com
[17] “CBO’s Current Economic Projections” January 25, 2005. www.cbo.gov

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