2006 In Review
It is December and the holiday season is upon us.
Time to reflect on the year past and the year ahead. 2006 was in general a pretty good
year for most of us. The economy expanded at a reasonable rate, the labor market was fairly
healthy and the unemployment rate low. The Fed kept interest rates unchanged at 5.25% for
the last three meetings, after raising them seventeen straight times to slow the economy and
stifle inflation. There is no doubt that the economy slowed during the fourth quarter, but
so far the Fed seems comfortable with the way things are going. The Fed’s main concern now
is keeping inflation at current or lower levels. Fed Chairman Bernanke, in a recent speech,
commented that policy makers are unlikely to cut interest rates in response to the downturn
in housing that has developed. Bernanke instead suggested that the U.S. economy will expand
toward its full capacity in the coming year and that a failure of inflation to decline would
be “especially troublesome.” He added that further Fed interest rate moves would be data
dependent.
Looking Ahead to 2007
In spite of Bernanke’s comments, the U.S. economy may head into 2007 in weaker than expected
shape. Recent economic numbers do not support the scenario sketched by Bernanke. Housing
starts fell in October to the lowest level in six years and building permits, a gauge of
future construction, fell for the ninth straight month. The slowing pace of residential
construction is likely to be a drag on economic growth next year. Automobile sales have
also weakened in recent months. It appears likely that the Federal Reserve will cut interest
rates in 2007 as the economy slows. How much will be determined by the depth of the housing
downturn and the slowing in consumer spending in the New Year. Let’s hope the Fed can
engineer a soft landing to the economy and avert a recession.
Trust Portfolios
Significant purchases for most Trust portfolios were made in
the third and fourth quarters of 2006 at the highest interest rates in over five years.
Maturities were lengthened and laddered to provide excellent earnings and cash flow for the future.
Additional securities with low coupons will mature in 2007, providing more opportunities for replacement
with higher yielding securities. 2006 was in general an excellent year for Trust Portfolios.
Happy Holidays
The year wouldn’t be complete without reflections on the most
important gift of this year and years past. That is the pleasure of working with so many
wonderful people both in our Trust clients and at NWA. I feel privileged to know and work
with each of you. Thank you for your support through the years. Happy holidays to you and
yours. I look forward to 2007 and the challenges ahead.
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