The rate of GDP growth in the first quarter appears to have slowed further from the anemic 0.6% rate of the 4th quarter of 2007. We expect first quarter GDP growth to turn out to be flat to slightly positive. This has been a consumer led pull back. Although personal consumption expenditures were up in January and February, they were probably flat to down in March. Consumers have seen their net worth decline as both housing prices and the stock market continued to slide. Food and energy have continued to take an increasing share of the wallet. Tight credit markets have affected, and will continue to affect, both consumers and businesses. Mortgage rates have not come down as much as Treasury Bonds and credit is tight for consumers. Credit availability or the lack thereof, is also affecting businesses. This has led to the services sector weakening, as well as a slowdown in durable goods orders. Tight credit is a result of the deleveraging of the financial services industry, which will continue for a while.

For the full year, however, we believe that the US will narrowly avoid recession and that GDP growth will be in the 1 - 2% range. Core inflation will run around 2% but headline inflation, thanks to stubbornly high food and energy prices, will remain 3.5 - 4%. We expect productivity growth to remain positive and interest rates to come down further. Meanwhile the weak dollar and stronger economic growth outside the US will continue to be good for exports. All these factors, plus the fiscal and monetary stimulus already in the system, will provide support to GDP.

The biggest risk remains the job market. So far initial jobless claims and the unemployment rate have stayed relatively low and out of recession territory, but are moving up. If, however, they spike up, that will bode ill for the economy. Additionally, any energy supply disruption or global turmoil could hurt the economy and the stock market. Finally, we expect the process of credit normalization to continue. Until last year, credit defaults had been running at very low levels by historical standards. The woes of the mortgage market have been now well publicized but we expect to see further deterioration in consumer credit card debt and in commercial credit, as default levels go back up. The upcoming Presidential election will also inject some uncertainty into the financial markets.

Reflecting the weakness in the economy, we expect further downward earnings revisions, which may include more major write-offs in the finance sector. We also do not anticipate the P/E of the stock market expanding in the near term. As a result, the market will continue to be choppy. But as certain oversold areas rebound, we still expect the overall US stock market to be able to eke out a single digit positive return this year.

We have been underweight financial and consumer stocks for the past six months. As some of the economic and financial turmoil subsides, we expect to add to those sectors in the portfolio.