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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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