Finance Highlights 2006 0301 - Laserfiche WebLink

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2005' A YEAP_ 6-1 P-EVIE ` Before we leap into the New Year, let's look back one last time at the events that helped to shape the economy in 2005. The Federal Reserve raised the Fed Funds target at eight consecutive meetings during 2005, from 2.25% to 4.25%. Short term treasury yields followed, with the three month bill rising 183 basis points to 4.08% and the two year treasury rising 131 basis points to 4.40%. Strong demand and tame inflation kept longer term rates relatively stable though, with the ten year treasury yield rising only 18 basis points to 4.39%. The result was a much flatter yield curve, and indeed, at the end of December the spread between two year and ten year treasuries became inverted for the first time since 2000. In the pastthis relationship has often forecast the onset of a recession, so it bears careful monitoring into the New Year. On August 29th, Hurricane Katrina made landfall on the Gulf Coast near New Orleans with sustained winds in excess of 125 miles per hour. High winds and flooding along the Gulf Coast caused an estimated $100 billion in damage, and nearly 1400 confirmed deaths. Shockwaves from the disaster were felt throughout the economy and financial markets; oil and natural gas prices soared, Congress approved a massive rebuilding package, and speculation abounded that the Fed would pause in its campaign of rate increases (it did not.) Although the disaster occurred more than four months ago, its effects will continue to be felt throughout 2006 as reconstruction continues. Soaring energy prices and supply shortages rarely left the headlines in 2005. The industrialization of China, India and other emerging economies continued to provide strong demand, while geopolitical uncertainty in key oil producing regions such as the Middle East and Latin America contributed to supply concerns. Matters came to a head at the end of the summer as Hurricane Katrina struck the gulf coast, seriously damaging US production and refining capacity. Crude oil prices, which had started the year at $42.12/bbl, soared as high as $69.81/bbl on August 30th. Prices have subsequently retreated somewhat from their post -disaster high, but still closed the year at $61.04/bbl, up nearly41 %. Housing prices in America continued to rise in 2005. In addition to f a v o r a b l e demographics,. this boom in housing has been fueled by a series of Federal Reserve rate cuts which in turn produced low mortgage rates. Speculative purchases of second and third homes, as well as exotic mortgage products, have fueled one of the great equity creation events of the past fifty years. The strength in housing flows through to the economy in three ways. First the construction, purchase and sale of homes produce job creation and demand for raw materials. Second, homeowners "feel" wealthier when the value of their house is rising, and are therefore willing to spend more. Finally, many homeowners "extract cash from their houses via home equity loans, and thus increase demand throughout the economy. In 2005, the labor market enjoyed its second year in a row of job growth and lower unemployment. The economy added an average of 168,000 jobs each month last year, comparable to the 182,000 jobs per month added the year before. This recent performance stands in stark contrast to 2003, when there was concern about a "jobless recovery", and the economy added only 94,000 jobs the entire year. The unemployment rate has steadily declined during this period from as high as 6.30% during 2003 to 4.90% at the end of 2005. Page 2 0 2005. Chandler Asset Management Inc, A Registered Investment Adviser