NATIONAL ECONOMY: The primary economic indicator, Gross Domestic Product (GDP) rose a somewhat "timid" 3.1% during the first quarter of this year. Expectations had been for a much stronger 3.5% to 4.0% increase. The original projections for GDP growth in 2005 of 4% to 5% have now been tempered to 3.5% to 4%. The new jobs numbers for April were heartening. Expectations had been for 175,000 new jobs to be created and according to the U.S. Department of Labor, 274,000 new jobs were actually delivered. The monthly new jobs numbers have been somewhat of an enigma over the last twelve months. There have been just as many months in which the new jobs numbers have been below expectations as there has been months when expectations have been exceeded. The average monthly new jobs created in the U.S. over the last year have been 181,000. Historically, during an economic recovery cycle, new jobs have grown at a rate of 200,000 to 300,000 per month. The national unemployment rate remained unchanged in April at 5.2%. According to the much-watched Institute For Supply Management Index (ISM), economic activity has slowed. Their manufacturing index for April was 53.3. That's down from 55.2 in March. Any index reading above 50 is considered to reflect positive economic growth, while any index reading below 50 is considered to reflect a contracting economy. According to Norbert J. Ore, Chair of the ISM, "In April, the manufacturing sector grew for the 23rd consecutive month. This represents the longest period of growth in the last 16 years. However, the rate of growth slowed to its lowest level since July 2003. A majority of the components that make up the Index have slowed. New orders are down 3.4%. Supplier Deliveries are down 1%. Inventories are down 6.2%. Backlog of Orders is down 3%. The Consumer Confidence Index dropped 5.3 points to 97.7 in April. That's down from 103.0 in the preceding month. On the inflation front, the GDP implicit price deflator rose from 2.7 to 3.2, suggesting that inflation risks during the first quarter were slightly higher. The Consumer Price Index (CPI), the most widely used measure of inflation edged upward in its most recent release, but the annualized change of the core index, which strips away more volatile food and energy costs, actually dropped a tenth of a point to an annualized 2.2%. This reinforces the notion that it is primarily energy costs that have been placing some upward pressure on inflation. So, what's going on with this economy and what can we expect? I believe a lot depends upon the actions of the Federal Reserve over the next few months.

THE FED WATCH & MORTGAGE RATES: Federal Reserve Chairman Alan Greenspan and his Federal Open Markets Committee (FOMC) raised the Fed Funds Rate one-quarter of a percent to 3%. This was the eighth 25 basis point increase in as many meetings since June of 2004. This latest increase represents a continuation of the FED's "measured" interest rate increase strategy. In their statement accompanying the rate increase, the FED said "The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices. Labor market conditions, however, apparently continue to improve gradually. Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained." Translated, Guru Greenspan and his merry band of interest rate setters believe that inflation poses a greater threat than a slowing economy and anticipate a continuation of tightening the interest rate thumbscrews. I believe that Greenspan is playing a very dangerous game of "chicken." His aggressive rate increases, if continued, could well send our "slowing" economy into a "stall". The facts are that virtually all recessions since World War II have been preceded by FED interest rate hikes. The growth in the monthly new job numbers has been erratic at best. Business and industry thrives best when they have a "stable" and "predictable" economic environment. A continuation of rising interest rates is anything but stable and a "yo-yo" new jobs barometer is anything but predictable. In my opinion, the good Dr. Greenspan needs to "back-off." The inflation we have is minimal and although the energy price bubble hasn't burst, crude oil certainly does not seem to be headed for $60 per barrel. Let the laws of supply and demand set prices for a few months and keep the FEDs big nose out of the economy. Long-term rates and mortgage rates have remained consistently low despite the short-term rate increase antics of our FED Chief. When asked during a recent Congressional hearing why long-term rates haven't risen with short-term rates, Dr. Greenspan answered, "it is a conundrum." In the past, the long-term rates would respond to the FEDs short-term rate hikes and curb economic expansion. Not so this time - so far. The difference between then and now is that China, Japan, and South Korea have been "propping up" our economy so that our consumers continue to buy their goods. With those foreign countries and others buying our U.S. Treasury securities, the 10-year Treasury Note, which is the benchmark for setting mortgage rates, has remained under 4.5% and that in turn provides a 30-year fixed rate mortgage under 6%. According to Grant's Interest Rate Observer newsletter this week, foreign banks had increased their holdings of U.S. debt securities by 63% since 2003 and now hold more than the FED itself holds. If for any reason, the foreign banks were to start selling the U.S. Treasury Securities, mortgage rates would jump anywhere from 50 to 100 basis points almost overnight. That in turn would have a very negative effect on home sales and homebuilding. However, if our economy was growing at a faster rate and jobs were being created at 300,000 to 400,000 per month, our long-term rates would not be at the mercy of foreign countries and their banks. In the meantime, if Guru Greenspan would leave his hands off the interest rate throttle, business and industry would become more aggressive and begin growing some real job numbers. Stay Tuned. Freddie Mac reported last Thursday that the 30-year fixed-rate mortgage was 5.77%. That's up from 5.75% one week earlier. Given the current course of economic events, we can expect the 30-year fixed-rate mortgage to be 6.5% by the end of this year and closing in on 7% by next spring.