Trust Department Quarterly Newsletter

2nd Quarter 2008

Consumer Spending and the Economy:

Over the last eight years the portion of our country’s total gross domestic product that was spent by the consumer rose from 68% to 72%. That 4% does not seem significant until you apply it to the total GDP of approximately 13 trillion dollars. Therefore, if Americans continue to tighten their spending and go back to the 68% of gross domestic product, that takes 500 billion dollars of spending out of the economy. That is about three times the stimulus package the government has sent out. It is estimated that only two- thirds of the stimulus will actually help the economy since one-third of it is projected to be saved.

The reasons that consumers are spending less are obvious. Declining home prices have put an end to much of the home equity borrowing that has supported consumer spending for much of the last eight years. The rise in unemployment has put a scare into many people. Credit card companies have tightened their standards because of rising delinquencies and the most obvious negative to the economy, rising gas prices.

The projected inflation rate for 2008 is 4%. With wages growing at an average of 3% the consumer, to no one’s surprise, has less discretionary income. Approximately one-half of the rise in the consumer price index is in food and energy. Because these are usually weekly expenditures we are more sensitive to the price hikes.

The Stock Market

As we stated in last quarter’s newsletter the Dow Jones rose 400 points on April 1. This did turn out to be an April fool’s joke. We saw the market continue to increase through the middle of May and came within 1.5 percentage points of getting back to where the market was at the end of 2007. The market then started its decline for the last half of the second quarter and ended down 7.4% for the quarter. This is the third quarter in a row that indexes have been down. Energy, utilities, technology and the commodity sectors rose during the quarter. Financial and consumer discretionary stocks took the biggest decline. The stock market needs some positive economic news to instill some investor confidence.

The Bond Market

Interest rates on government bonds increased during the quarter. The yield on a 10-year treasury went from 3.4% to 4.1% during the quarter. Even though the Federal Reserve has not started raising rates the bond market has seen these increases. We have also seen the interest rate on mortgages increase during the quarter. We anticipate the rates to drift slightly higher and for the Federal Reserve to increase rates in the last quarter of 2008.

Oil Versus Water

We hear about the price of oil on a daily basis. With oil at or about $140 a barrel it compares to the following: