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MADISON, Wis. – If consumers continue to purchase big-ticket items such as homes and cars – the main contributors to the U.S. economy’s “modest” level of growth – low interest rates and tax cuts may be around the corner for 2003, this according to MEMBERS Capital Advisers economic outlook for the year. Indeed, steady consumer spending spells good news for credit unions and their lending programs, said Mike Daubs, president/CEO of MEMBERS Capital Advisors, CUNA Mutual Group’s investment advisor affiliate. Further, steadily improving worker productivity is allowing U.S. corporations to generate profits without raising prices, strong factors that prompt consumers to take advantage of retail purchases. “The remarkable growth engine that is the U.S. economy is in sound shape,” Daubs said. “It just may take a little longer getting going than normal. It’s difficult to see upticks in growth when we all have the remarkable expansion of the 1990s still fresh in our minds. But those upticks are there, and they keep coming.” Still, the loom of a war with Iraq could throw investor confidence into a tailspin. In 2002, stock indexes posted a third consecutive year of declines for only the third time in the last 100 years. The bubble in technology stocks that provided such “great theater” for speculators during the 1990s continued to implode, leaving much financial pain in its wake, Daubs said. Prices for stock indexes have moved markedly lower during the last two years. Unfortunately, so have corporate earnings, offsetting some of the cleansing benefits of the market correction. A “stock picker’s” market has emerged that disallows random selection of issues in hot sectors. “The 1990s are truly over in this regard,” Daubs said. The stock valuation question will remain a challenge in 2003, according to MEMBERS. The Bush Administration may propose a tax cut or elimination of taxes on corporate income at the investor level. Such a move would stimulate the economy by infusing cash into thesystem. Lower-quality bond investors have been “waiting patiently” for economic conditions that will support a rally in prices. In 2003, their patience may pay off, as the operating environment for high-yield bond issuers improves and default rates decline. Most of the winners will be concentrated in improving industries, and most of the losers will be concentrated in industries that still suffer from significant over-capacity, Daubs said. Telecommunication firms now dominate the high-yield market and remain vulnerable. International strife, slow economic conditions in the U.S., and aggressive interest rate cuts by the Federal Reserve Board created a nearly perfect environment for high-quality investments. Still, as economic conditions gradually improve, and if stock markets post gains that are closer to their long-term averages, it is likely that investors will be willing to assume greater risk by favoring non-Treasury securities, Daubs said. “This is not to say the stage is set for a stock market-like massive sell-off,” Daubs emphasized. “We expect the U.S. economy to improve, but a rapid return to potentially inflationary, robust growth seems unlikely. Also, national security threats will still weigh heavily on the minds of investors, so the relative safe haven of U.S. Treasuries will most likely continue to be attractive to many.” From a longer-term perspective, federal and state governments have dipped back into deep deficit spending territory. With increasing demands being placed on governments to provide social services and national security, Daubs said “deficits will be with us for a long time,” adding, “if tax cut proposals that are being championed by the White House are enacted, it is likely they will add to deficits at the federal level. State and local governments are facing significant challenges as a result of a quick downturn in tax revenues resulting from stagnant economic conditions, the economic outlook points out. Governments, which are required to balance their budgets, must raise revenues, cut spending or dip into rapidly depleting reserve funds. The prospect of raising taxes and cutting spending have little appeal, so additional borrowing is the only “sellable” tool at most state and local governments’ disposal. “Fortunately, these state and local fiscal challenges are already represented in the municipal bond market. As a result, municipal bonds could offer attractive opportunities for investors in 2003,” according to the MEMBERS report. -

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