Trust Services

Miles To Go

Economic activity in the first quarter suggested continued growth as momentum carried over from the end of last year. While the recovery continues to gain a firmer foothold thereby reducing any concerns of a double-dip recession, the magnitude of growth remains short of other post-recession growth spurts.

Progress remains on track in the manufacturing economy. Factory orders came in above expectations for February, while January’s increase was revised even higher. The Institute for Supply Management’s manufacturing index registered 59.6% in March – its highest reading since 59.9% in July 2004. The acceleration in both new orders and production imply continued growth in the coming quarter. The prices paid index also accelerated, which is typical as growth ramps up; however, rising manufacturing costs can contribute to inflationary pressures and erode profits.

While the worst may be over for labor markets with regard to layoffs, the outlook for job growth remains mixed. Upbeat headlines from the March employment report indicated a gain of 162,000 jobs for the month, which included the federal government hiring of 48,000 temporary census workers. Payrolls in both health care and temporary help services continued to rise. In fact, since September 2009 employment in temporary help services has increased by 313,000 – a trend that typically precedes a rise in permanent hiring. However, the official unemployment rate held steady at 9.7% throughout the first quarter of 2010 and is expected to remain uncomfortably high for the next few years. The average duration of unemployment has extended to 31.2 weeks, up significantly from the average 20.8 weeks of one year ago. Meanwhile, the number of persons counted as part time for economic reasons remains around 9 million. The less robust pace of the recovery coincides with restrained job growth, as does the secular trend of transitioning away from a goods-producing economy toward one that is predominantly service providing. This has created a structural unemployment that is evident in the widening gap in unemployment rates by educational attainment for people age 25 and older. For those with a Bachelor’s degree or higher, the March unemployment rate was 4.9%; for those with a high school diploma but no college, the rate soars to 10.8%.

Acknowledging both the improving strength in the economy as well as the persistent weakness in the housing and labor markets, the Federal Open Market Committee held the target range for the federal funds rate at 0% to ¼% throughout the quarter. While the Fed signals their intent to keep rates low for “an extended period”, they also continue to unwind the special initiatives taken to contain the financial crisis. The Fed reaffirmed the end-of-March completion of their program for the purchase of mortgage-backed securities and agency debt.

The Treasury yield curve was little changed for the quarter, and the Barclay’s Capital Intermediate Bond Index had a total return of 1.81%. Despite a pullback in January, the stock market trended higher in both February and March resulting in a net positive gain for the quarter. The Standard & Poor’s 500 Index returned 5.39% for the first three months of 2010, boosted by double digit gains in the industrials, financials and consumer discretionary sectors. The utilities and telecommunications groups lagged the index for the period. Other domestic indices also fared well, as the Dow netted 4.82% and NASDAQ returned 5.91% in the first quarter.

We expect the economic expansion to continue, but at a subdued pace as growth remains hindered by housing and employment. We expect gradual improvement as fiscal and monetary policy stimulus works with a lag and continues to fuel the economic recovery.

As of Market close Wednesday March 31, 2010