Alan Greenspan recent statements indicate a shift in Fed’s policy away from raising interest rates to fight inflation. Mr. Greenspan is worried about a rapidly weakening economy in the midst of political uncertainties. But, he is still seeing signs of inflationary pressures, especially from oil prices. We think that the Fed will hold the line on interest rates until early next year.

The results of the presidential election were unprecedented. The controversy has raised the level of uncertainty for the economic outlook. We think the next president will govern without a mandate. If the political crisis intensifies, it is likely to cause an equity market meltdown and to take a toll on consumer sentiment for the next several months.

The preliminary estimates for third quarter GDP point to a weakening trend in the economy. GDP grew 2.4 percent, following 4.8 percent and 5.6 percent during the first and second quarter respectively. Interestingly, aa big factor behind the slower growth rate was a decline in federal government expenditures of 10.1 percent, which is not likely to be repeated in the fourth quarter. Residential construction was down 9.2 percent in the quarter. On the other hand, personal consumption expenditures were up 4.5 percent, of which, durable goods spending increased by 7.5 percent. Business fixed investment cooled off substantially, which tallies with recent reports of weaker earnings.

While economic activity appears to be slowing, we do not think the slowdown is sufficient to calm inflationary fears. Inflation is still a threat. In its most recent meeting, OPEC members agreed to hold back on any further increase in production, thus raising the possibility that oil prices will remain in the $30 range for the foreseeable future. Labor costs increases have so far been moderate, when compared to growth in productivity. However, a slowdown in business investments could result in a significant decline in productivity growth, thus adding to labor cost pressures.