Bank of America Capital Management Releases 'U.S. Economic Projections' For Week of March 31, 2003
Press Release Source: Bank of America Corporation Friday March 28, 2:48 pm ET
Note to editor: The "U.S. Economic Projections" report that follows is written each week by Lynn Reaser, Ph.D., chief economist and senior market strategist for Banc of America Capital Management. The report is a publication of Banc of America Capital Management, which is the primary investment management group of Bank of America. Banc of America Capital Management develops investment management products and services for distribution to individual and institutional clients, and advised more than $267 billion in assets as of December 31, 2002.
NEW YORK/ST. LOUIS and CHARLOTTE, N.C., March 28 /PRNewswire/ -- Banc of America Capital Management today released the latest "U.S. Economic Projections" report:
For Week of March 31, 2003
Awaiting Signs of Spring
CURRENT MARKET FOCUS
As new blades of grass appear, the world hopes that spring will soon bring resolution to the Iraqi conflict. Although the U.S.-led war against Iraq has been under way for just 10 days, investors' emotions have swung from euphoria to despair to uncertainty.
Recent reports have reflected a winter-like grip on the U.S. economy. Sales of both new and existing homes fell in February, while factory orders for durable goods forfeited more than half of their January gain. Consumer confidence measures also fell in March to their lowest levels in about a decade.
Yet, more current data collected after the conflict began reveal the resilience of the U.S. economy. Reports from auto dealers, realtors and retailers indicate that consumer spending has far from collapsed.
The airlines are clearly suffering, with traffic dropping sharply due to the uncertain environment. Domestic bookings for the next 60 days are now down 20% from levels of a year ago, while international bookings are off 40%. Concerns about SARS (severe acute respiratory syndrome) are especially depressing travel to Asia.
THE WEEK AHEAD
Prepare for more signs of gray in economic reports scheduled for release next week. However, improved weather conditions following February's severe storms likely helped to offset the generally soft fundamentals accompanying the launch of the attack against Iraq.
Expect the Institute for Supply Management's indices of manufacturing and non-manufacturing activity for March to have eased somewhat from February's levels. Meanwhile, sales of autos and light trucks likely edged up only slightly last month given rising gasoline prices and prior rich sales incentives. Employment figures for March may show a tiny gain following the prior month's steep loss of more than 300,000 jobs. However, expect the jobless rate to drift higher, to 5.9% from 5.8% in February.
The availability and price of oil will remain major factors in the global economic outlook. Fortunately, the Iraqi oil fields have been spared significant damage. Thus, while oil prices have backed up to around $30 per barrel, they remain well below the high of around $38 per barrel reached just two weeks ago.
The cutoff of Iraqi supplies amounts to about 2 million barrels of oil per day, while civil unrest in Nigeria has reduced that nation's daily production by another 800,000 barrels. Most of Venezuela's recent reduction has been restored. Overall, about 4% of world consumption has been disrupted, an amount currently being offset by higher OPEC production, primarily by Saudi Arabia.
THE STOCK MARKET
After the prior week's spectacular display of optimism, some pullback in stock prices would have been expected this week even without renewed concerns over Iraq. All of the major market indices -- the Dow Jones Industrial Average, the S&P 500 Index and Nasdaq -- were on track to record weekly losses as of noon Friday.
Even as a new chill regarding the war's duration has swept over the market, the Dow Jones Industrial Average has retained a considerable gain over its recent low of Mar. 11. As of noon Friday, the Dow Industrials were still up about 600 points from their recent low.
Investors did retreat to some safer havens this past week. The defensive sectors of energy, health care and utilities outperformed the overall S&P Index for the week.
Meanwhile, the dollar lost some of its recent gain, with the euro approaching $1.08 on Friday. Still, the euro remains below its recent high of more than $1.10 reached on Mar. 10.
The coming week will feature the first batch of earnings releases for the first quarter. Brace for generally drab or even bleak reports. Companies scheduled to release earnings next week include Best Buy, Bed Bath & Beyond, and Circuit City (retail); Alcoa (basic materials); and El Paso (energy). At the same time, heightened uncertainty will likely lead more firms to reduce expectations for the period ahead.
THE BOND MARKET
Temperatures warmed in the bond market this week as expectations mounted that the Iraqi conflict would be longer and more difficult than believed just a week ago. However, mirroring the movement of other war-sensitive commodities and assets -- such as oil, gold, stocks and the dollar -- Treasury bonds have not completely retraced their steps since the war began. As of noon Friday, the 10-year U.S. Treasury note was yielding 3.89%. While down considerably from the peak of 4.11% reached just a week ago, bond yields remain well above the 3.59% level of Mar. 10.
Regarding monetary policy, Federal Reserve officials have maintained that a successful conclusion of the Iraqi conflict would unlock the economy's potential by reducing oil price premiums and the uncertainty holding back business capital spending and other activity. Early reaction in the financial markets would tend to support those assumptions.
While no one can be certain of the precise outcome, the war effort seems more likely to require weeks rather than months. If that is the case and the economy holds up reasonably well in the interim, as we currently expect, the Fed will likely remain on the sidelines. However, if consumer and business spending start to weaken appreciably and the war timeline stretches to three to six months, look for the Federal Reserve to cut interest rates.
With respect to fiscal policy, which has important implications for both stocks and bonds, the Senate sliced in half the President's proposed tax cut of $726 billion over five years. This reduction to $350 billion follows the House of Representatives' approval of the total $726 billion package. The two amounts will now be reconciled in House-Senate conference committees. While a compromise budget resolution is likely to provide for a sizable tax cut, growing concerns about the costs to rebuild Iraq are likely to reduce its size from the President's proposed plan. A sizable scaling back of dividend tax relief also appears likely given current political opposition.
On balance, look for prices of all financial assets to continue to trade on every report emanating from Baghdad and other critical points in Iraq during the next several days. This will be a time for investors to remain patient and confident in their long-term investment strategies.
Indicators to watch
Indicator Institute for Supply Management Manufacturing Index - March
Release Date Tuesday, April 1, 10:00 a.m. EST
February 50.5
Forecast 49.5 (49.0 to 50.0 range)
Comments Factory activity likely slipped in March as war concerns and
rising energy costs crimped business activity. Improving
weather may have provided some support.
Indicator Construction Spending - February
Release Date Tuesday, April 1, 10:00 a.m. EST
January 1.7%
Forecast -0.9% (-1.2% to -0.7% range)
Comments Prepare for a substantial reversal in construction spending
equal to about half of the sharp gain seen in February.
Severe weather in the East and Midwest probably held back
homebuilding, nonresidential construction and public works
projects during the month.
Indicator Auto and Truck Sales - March
Release Date Tuesday, April 1
February 15.3 million
Forecast 15.4 million (15.4 million to 15.5 million range)
Comments Early industry reports suggest that sales of autos and
light trucks held close to February's levels. The recent
jump in gasoline prices may be delaying purchase decisions.
December's sales surge in response to generous incentives
also pulled some of this year's potential sales into 2002.
Indicator New Factory Orders - February
Release Date Wednesday, April 2, 10:00 a.m. EST
January 1.5%
Forecast -0.7% (-1.0% to -0.5% range)
Comments Look for a small 0.2% drop in orders for nondurable goods to
add to the 1.2% decline in durable goods already reported.
The overall decline in orders would suggest that companies
continue to see lackluster demand and have little incentive
to rebuild inventories.
Indicator Initial Claims for Unemployment Insurance - week ended
3/29/03
Release Date Thursday, April 3, 8:30 a.m. EST
Prior Week 402,000
Forecast 408,000 (406,000 to 410,000 range)
Comments Last week's 25,000 drop in jobless claims provided a welcome
respite in a recent trend of generally weak economic
numbers. Do not be surprised to see claims rise again in
the latest report, although a number below 420,000 would
represent significant improvement from levels reported for
the first half of March.
Indicator Institute for Supply Management Non-Manufacturing Index -
March
Release Date Thursday, April 3, 10:00 a.m. EST
February 53.9
Forecast 52.5 (52.0 to 53.0 range)
Comments Look for this barometer of activity in the non-manufacturing
sector to remain above the 50.0 break-even mark. However,
do not be surprised to see some deterioration from
February's level, reflecting a significant weakening among
the airlines and reduced orders and spending by firms in
other non-manufacturing areas.
Indicator Unemployment Rate - March
Release Date Friday, April 4, 8:30 a.m. EST
January 5.8%
Forecast 5.9% (5.9% to 6.0% range)
Comments Look for the jobless rate to edge higher as companies' focus
on cost control and uncertainty about the future continues
to hold back hiring. The economy will need to grow faster
than its potential of slightly more than 3.0% in real terms
before progress can be achieved in reducing the unemployment
rate.
Indicator Nonfarm Employment - March
Release Date Friday, April 4, 8:30 a.m. EST
January -308,000
Forecast 10,000 (-10,000 to 20,000 range)
Comments Following the sizable swings of the past two months,
payrolls should flatten out with a small overall increase
for March. Anticipate further losses in factory jobs, but
increases in construction, retailing and the services
sectors thanks in large part to better weather.
Indicator Hourly Earnings - March
Release Date Friday, April 4, 8:30 a.m. EST
January 0.7%
Forecast 0.3% (0.2% to 0.3% range)
Comments Anticipate a moderate rise in hourly earnings equal to the
average gain of the past six months. Relative to a year
ago, this would represent a gain of 3.3%, which would mean
that wage earners are still keeping slightly ahead of
inflation (recently at 3.0%).
Economic Forecasts
2002Q3 2002Q4 2003Q1f 2003Q2f 2003Q3f 2003Q4f 2002 2003f
Real GDP (% chg.
annual rate) 4.0 1.4 2.1 1.7 4.0 4.2 2.4 2.4
CPI (% chg.
annual rate) 2.2 2.0 3.6 1.1 1.6 2.4 1.6 2.3
Personal Consumption
Price Index (%
chg. annual
rate) 1.7 1.8 2.4 0.9 1.6 2.0 1.4 1.8
S&P 500 Operating
Earnings ($ per
share) 12.28 12.23 12.40 13.25 13.60 13.75 48.00 53.00
Federal Funds
Rate (%, end
of period) 1.75 1.25 1.25 1.25 1.50 2.00 1.25 2.00
10-Year Treasury
Note Yield (%,
end of period) 3.93 3.83 3.92 4.25 4.75 5.10 3.83 5.10
Euro ($/euro,
end of period) 0.99 1.05 1.07 1.04 1.03 1.02 1.05 1.02
Yen (yen/$, end
of period) 122 119 120 124 125 124 119 124
The information and data provided in this analysis are derived from sources that we deem to be reliable and accurate. Any opinions expressed are strictly the opinion of Banc of America Capital Management and are subject to change without notice.
Banc of America Capital Management provides access to extensive investment expertise, which is available within its own organization, as well as through strategic affiliations. Banc of America Capital Management offers the following:
- investment advisory services for many institutional client types, including, but not limited to: corporations, municipalities, foundations and universities.
- a broad range of investment options and services, including establishing asset allocation models for institutional portfolios; managing investments in stocks, bonds, and cash; and serving as the investment sub-adviser to many of the Nations Funds, a mutual fund family with more than $267 billion in assets as of December 31, 2002.
- experienced analysts and strategists who provide expert insight into the economy, businesses, and financial markets. This professionalism and expertise is put to work on behalf of clients in the most effective ways possible.
- Lynn Reaser, Ph.D.
- Chief Economist & Senior Market Strategist
- Banc of America Capital Management
- March 28, 2003
Source: Bank of America Corporation