Fisher Capital Management: Market Performance – US Economy

Fisher Capital Management Report, Part 1 - Output growth exceeded what were once
considered lofty expectations during the third quarter, as real GDP (inflation adjusted Gross
Domestic Product) rose by a 3.5% annual pace from the previous quarter. To be sure, this was
the first gain in economic activity after four consecutive quarterly declines in GDP. While
technically this indicates an end to the recession, we point out that on a year-over-year (YOY)
basis, economic activity has still declined 2.3%, yet it represents an improvement from the
-3.8% YOY in the second quarter, the worst annual drop in seven decades. The components of
GDP were led by growth in personal consumption, which increased 3.4% as stimulus programs
such as “Cash for Clunkers” allowed consumer spending to increase by the largest amount in
two years. Home construction surged at an annual rate of 23%, spurred on by the $8,000 tax
credit for first-time buyers. Another decline in business inventories also added to output, as did
the growth in government spending (2.3%). Though businesses increased spending on
equipment and software, fixed investment remained weak.

Market Performance, US Economy: Fisher Capital Management Report - As the positive effects
of federal stimuli diminish, we continue to project an economic recovery that is “less
spectacular” than in previous experiences. While output growth has improved as government
programs spurred consumption relative to housing and autos, our concern rests on the
economy¹s ability to sustain these rates of growth as government programs wane. Indeed,
personal spending fell 0.5% in September after the “Cash for Clunkers” program concluded in
August. Consumer confidence also weakened in October as the unemployment rate
approached 10%. Until we experience a sustainable floor in housing and a ceiling on the
unemployment rate, we suspect output growth will rely on exports, inventories, and government
outlays, areas that we characterize as “cushions” for growth.

Market Performance, US Economy: Fisher Capital Management Report - As the unemployment

rate lingers within the range of 10% and Fed policymakers remain committed to keeping interest
rates low for an “extended period,” we look for real GDP to expand at an average rate of
approximately 2.5% in 2010.

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