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You and Your Money

Economic Outlook – 2nd Quarter 2010

The worst global recession since the 1930s ended somewhere in the middle of 2009.  Since then, the U.S. economy has stabilized and begun to recover. Indeed, GDP growth in the final 3 months of 2009 topped 5%—the best quarter in more than 6 years. The job market remains quite poor, but the monthly bleeding of jobs has stopped getting worse. The same can be said for the housing market. Things are better, and that is a big reason for the stock market’s dramatic 60% rally from the depths of the bear market last March.

The U.S. is in the midst of what one analyst calls a “feel bad recovery.” We expect the economy to grow for the next several quarters, but at a frustratingly slow pace. The strongest phase will likely be in the first half of the year, primarily due to the maximum impact of fiscal stimulus spending and a cyclical rebuilding of depleted inventories. After that, the stimulus wanes and we doubt that the debt-ridden consumer and real estate sectors will be in a strong position to pick up the slack.  So, a downshift in growth in the second half and into 2011 is likely.

Trillion-dollar deficits and a declining currency have led many to worry about a rise in inflation. We believe this is a very valid—but premature—concern.

Unemployment is expected to remain high throughout the year, and the resulting slack in the labor market should leave inflation tame into 2011. However, we anticipate that investors will become increasingly, and justifiably, nervous about inflation over the next couple of years.

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