October 2003 Executive Summary

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

Lansing-area economic activity accelerated in the third quarter, as it appears that low interest rates, aggressive Federal Reserve stimulation and federal tax cuts are stimulating growth. The Greater Lansing Business Index rose to a preliminary level of 119.8 in September, compared with 114.3 in May. The index combines six local economic variables to create a comprehensive barometer for local business activity.

The Greater Lansing Business Index grew 4.8 percent in the summer period from May’s level. This marked one of the stronger growth rates the index has experienced in the last three years. Although the index saw gains, the monthly pattern was very volatile because of the extreme seasonal patterns in motor vehicle production and real estate markets. Despite the index being seasonally adjusted, some periods of added volatility can distort the monthly pattern in the index, which is why the six-month moving average calculation, to smooth monthly fluctuations, can also be a useful measure.

The temper of recent data has become sunnier, suggesting that the United States, Michigan and Lansing economic recovery is poised to shift from low gear to high gear. Real gross domestic product (GDP) increased at an annualized pace of only 1.4 percent in the last quarter of 2002 and the first quarter of 2003, readings so low that the economy could be described as having suffered a “growth recession.” But according to the preliminary estimate, GDP rose a better-than-expected 3.1 percent annualized in the second quarter of 2003. Other data provides hope the economic cold spell is over.

The housing sector has been remarkably vital in the past two years. In the past three quarters, housing starts for single-family homes have remained slightly above the 1.4 million-unit annualized pace, the highest since 1978.

After a weak spell, retail sales excluding vehicles advanced at a healthy pace, and weekly chain store surveys indicate further improvement. Light vehicle sales rose in the second quarter, following a setback in the first quarter; they seem to be holding their own so far in the fourth quarter. The May 2003 tax law ought to give a boost to consumer spending in the next few months.

The Institute for Supply Management conducts monthly surveys of firms in the manufacturing and non-manufacturing sectors. The manufacturing survey slumped badly in the first four months of the year to a borderline-recessionary level but it rebounded in May, June, July, August and September to a level consistent with a mild expansion. The survey of non-manufacturing firms also slumped early in the year, but it rose in the past three months to its highest level since mid-2000, signaling solid expansion in the service sector.

Financial markets are forecasting that the recovery is getting stronger. Since its recent low on March 11, the broad Wilshire stock price index has surged about 30 percent. The spread of corporate bond yields relative to Treasury yields has narrowed since last October. The yield on the 10-year Treasury note has increased about 120 basis points in six weeks, making the yield curve very steep. Finally, growth in money and bank credit is getting more vigorous. Ultimately, business conditions are significantly improving, which bodes well for mid-Michigan during the next year.