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Weekly Economic and Financial Commentary

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The Institute for Supply Management's (ISM) headline manufacturing index remained solidly in expansionary territory in March, reflecting continued strength in the manufacturing sector. The forward-looking new orders index has remained well above the threshold of 50 for nine consecutive months and at 61.5, it continues to suggest further gains in industrial production. Regional manufacturing surveys rose in April, suggesting headline ISM will remain in expansionary territory. The inventories index came in above 50 for the first time in almost four years in March as manufacturers continue to bring stock in line with sales. The employment index has been above 50 for four consecutive months and continues to suggest stabilization in manufacturing employment. Consequently, we expect the ISM index will remain solidly in expansionary territory in April.

Previous: 59.6 Wells Fargo: 60.1

Nonfarm productivity rose at a 6.2 percent annual pace in the fourth quarter as businesses continued to find ways to squeeze more output out of fewer workers. The robust gains in productivity are typical in the early stages of a recovery, but are short-lived as the recovery becomes self-sustaining and underlying demand picks-up. Much of the productivity gains were due to cost-cutting, but as the recovery takes hold, we expect to see a decline in the pace of productivity growth. Hence, we expect nonfarm productivity to increase only 2.8 percent in the first quarter. The combination of strong output and low compensation growth will likely pull unit labor costs down for the fourth consecutive quarter. The downward trend in labor costs should continue to help boost corporate earnings and keep inflation contained.

Previous: 6.9% Wells Fargo: 2.8%

Nonfarm employment moved back into positive territory in a convincing manner in March, further bolstering the view that a sustainable recovery has taken hold. Nonfarm payrolls increased by 162,000 jobs with manufacturing employment rising for the third consecutive month. While temporary and census hiring contributed to a little more than half of the boost, increases were fairly broad based. The private sector added 123,000 jobs to payrolls in March. We expect April will continue the positive momentum with payrolls increasing by 200,000 jobs and the unemployment rate remaining at 9.7 percent. While census hiring will likely continue to boost employment through May, private sector employment should be sustainable by the fourth quarter. The return of job growth is essential to generate a self-reinforcing recovery.

Previous: 162K Wells Fargo: 200K

The U.K. economy grew 0.2 percent in the first quarter of 2010 which was half the 0.4 percent increase the consensus had been expecting. A brutally cold winter in the United Kingdom sapped economic growth by keeping consumers at home instead of in the shops and by slowing construction activity. Fairer weather in recent months has brought consumers out of hiding. Retail sales for March saw an improvement of 0.4 percent from the previous month.

Previous: 57.2 (Manufacturing)

Recent financial news from Europe has been primarily concerned with the most recent round of credit downgrade for Portugal and the lowering of Greek debt to “junk” status. See the “International Review” section of this report for more details. With the sovereign debt issues as the backdrop, the stage is set for ECB President Jean-Claude Trichet to attempt to impart a calming influence on European debt markets.

While we do not anticipate any change to the primary lending rate or the ECB outlook for rates, the Bank's statement will be closely watched for other reasons. Clearly any bailout package is outside the purview of the ECB, but Trichet may announce plans to help break the logjam of strained credit markets in Greece, Portugal and Spain by extending lower-end collateral or other unconventional measures. The announcement is due out on Thursday.

Previous: 1.00% Wells Fargo: 1.00%

The Canadian job market has been gradually recovering since midsummer 2009. While payrolls increased again in March, the gain was smaller than most market-watchers had expected. The details of the report showed the second straight month of gains in goods-producing industries like construction and manufacturing, but a decline in service-sector jobs. According to the Ivey survey, which measures various aspects of business sentiment, employers are gearing up for more hiring. In March, the employment index of the Ivey survey crossed into expansion territory for the first time since September 2009.

We get our next look at the Ivey survey on Thursday of next week. The overall index has been above 50 for nine of the past 10 months, consistent with the ongoing recovery in the broader Canadian economy.

Previous: 17.9K

Florida Is Looking A Little Better

We held a conference call on the Florida's economy this past Tuesday and reported on some encouraging developments in the Sunshine State. Florida was ground zero for the housing boom and bust, and many areas of the state are still dealing with the aftermath of the housing bubble. The biggest problem areas tend to be the state's smaller metropolitan areas along Florida's Gulf and Atlantic Coast, as well as many of the areas around Orlando and up toward Ocala. Construction jobs and related industries accounted for the bulk of economic activity in many of these areas during the bubble years and most remain severely depressed with unusually high unemployment rates.

Amid the rubble, signs are beginning to emerge that suggest Florida's economy is now on the mend. Nonfarm employment grew during the first quarter, with payrolls climbing at a 0.3 percent annual rate. While that gain is very tentative and was concentrated in just one month, February, and the details within the employment data are encouraging. A broad assortment of industries reported job gains over the past three months, including some of the most problematic areas of the economy such as manufacturing and construction. Improvement was also evident across most of Florida's large metropolitan areas, with areas either showing modest gains or a sharp slowdown in job losses. The overall employment data now look very similar to what occurred at the start of the last two expansions.

Other signs of improvement include a long gradual upswing in consumer confidence and stronger numbers from the state's important tourism sector. Airport traffic and hotel occupancy rates were both up sharply in March compared to the same month one year ago, although discounts remain rampant. The charts from the call are available on our Web site and a replay of the call is available at 1-800-642-1687, conference ID 67490694, through the end of May.

Wachovia Corporation

Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.


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