April 2004 Executive Summary

Prepared by David G. Sowerby, CFA
Loomis, Sayles & Company, LP

Lansing-area economic activity moderately accelerated in the first quarter of 2004. The Greater Lansing Business Index rose to a preliminary level of 125.4 in March, compared with 125.7 at year-end 2003. Although the index was unchanged from December 2003 through March 2004, the first three months of 2004 witnessed a modest gain versus the fourth quarter of 2003.

One key element in measuring more sustained growth in the first quarter, the Greater Lansing Business Index was up nearly 9 percent in the winter period from year ago levels. This marked one of the stronger growth rates the index has experienced in the last two years. The more recent evidence of business statistics has steadily gained strength, implying that the United States, Michigan and Lansing economic recovery is gathering momentum. Among the local business components that witnessed strength were rising stock prices, improved motor vehicle production and higher energy usage. To create a comprehensive barometer for local business activity, the index combines six local economic variables:

1. Residential housing units built (seasonally adjusted)
2. Motor vehicle production (seasonally adjusted)
3. Hotel occupancy rates (seasonally adjusted)
4. Kilowatt per hour usage (seasonally adjusted)
5. Ingham County employment
6. Local area stock prices

There is now increasing evidence that a global economic boom is starting, led by the United States. The manufacturing index slumped so badly in the first four months of 2003 that it indicated borderline-recessionary conditions. Fortunately, it rebounded in the last 12 months. Remarkably, the new orders subcomponent surged to its highest level since 1950, suggesting that capital spending is about to accelerate. Finally, the employment subcomponent rose to its highest point since the glory days of 1999, indicating that the long and painful plunge in manufacturing jobs should end soon.

This optimism is not confined to larger firms. The National Federation of Independent Business has reported that its Small Business Optimism Index increased to its highest level since monthly surveys commenced in 1986.

The long-suffering labor market is showing some signs of recovery. In particular, payrolls have increased since August, the unemployment rate has shown a downturn, and initial claims for unemployment compensation have dropped to their lowest level since 2000.

There are ample reasons for optimism:

• The Fed continues to keep short-term interest rates low.
• The cut in federal personal income tax rates has boosted household incomes.
• Investment tax incentives, which expire at the end of 2004, are pushing businesses to accelerate investment spending
• Inventories are lean, indicating that inventory rebuilding should boost production.
• The falling dollar should stimulate exports and trim imports.
• Economic recovery in major trading partners should also boost exports.