Consumer spending is holding the economy afloat, and is expected to do so for the near term. But in spite of the fact that we are forecasting economic growth, there are a numbers of factors in play that could slow this process.

Investment spending by business remains weak and, given the recent performance of the stock market, is likely to remain so for quite some time. Businesses are struggling to return to profitability, so cutting costs out of production is their chief concern now, not finding new ways to invest. In addition, the threat of war with Iraq, fear of more terrorist attacks, and reports of corporate corruption have put a damper on the average person's appetite for buying stock in many of our companies.

Given the historical relationship between equity prices and business spending, we won't see appreciable increases in investments until the second quarter of this year. So once again, any near-term prospects for economic recovery fall to consumers.

At this point, we have several reasons to be optimistic about consumers' ability to keep the recovery in motion. First, personal income will continue to grow. For the month ending the third quarter of 2002, income increased by a healthy 0.4%, and wage and salary income rose by an even greater 0.6%, reflecting gains in productivity.

Also buttressing spending has been an abundance of cheap credit, especially for housing and automobile purchases. Consumers have been willing to take on debt related to housing because they feel — and rightly so — they may never again see rates this low. In addition, high levels of appreciation in real estate over the past two years have led people to believe that this is the best place to invest their money. Unfortunately, that kind of kind appreciation will slow dramatically once supply overtakes demand and interest rates rise again.

The future health of the economy will depend on whether or not consumers maintain their ability and willingness to buy cars, homes, and numerous other items. A critical determinant is whether conditions in the labor market will continue to deteriorate. If business confidence and/or profits deteriorate further, the job market could soften considerably. Emergence of more corporate improprieties, an acceleration in bankruptcies, or a spike in oil prices could all threaten profitability.

Labor markets have been relatively flat lately, with businesses adding jobs at about the same rate as they're shedding them. For a recovery to continue, however, we need to see an influx in jobs in the manufacturing sector rather than the service sector. First-time unemployment claims have been very volatile recently, and have remained below 400,000 for the last few weeks.

Another critical factor is the health of consumer credit. Ample and available funds are critical to maintaining demand. Delinquent mortgages and other signs of weakening credit worthiness have been on the rise, but so far, lenders have not sharply reigned in their lending practices.

At this time, our expectation is that employment levels and credit availability will remain healthy enough to sustain consumer spending. Consequently, we do not foresee further economic contraction in the near future.

But the risks are still out there. For the next couple of quarters, we'll have to monitor employment levels and measures of credit-worthiness very closely.

So while we do expect the economy to gain steam during 2003, what we don't know is how much and how soon.