THE STATE OF THE OWL FUND

WHAT THE STATE OF THE UNION ADDRESS MEANS FOR OUR FUTURE INVESTMENTS

President Barack Obamas State of the Union address Tuesday night drew immediate reactions from politicians of both parties. The presidents liberal address included an attack on climate change, an increase in the minimum wage, comprehensive immigration reform, passing stricter gun-control laws, and the reduction of the budget deficit through a mix of tax increases and spending cuts. In addition, promises were made to reduce troop levels in Afghanistan by half over the next year, and to provide lower class citizens with high quality schools. Unfortunately, it is unlikely that the President will be able to accomplish every one of these goals in the mere four years he has. What can be expected, though, are investments into our kids, infrastructure, and manufacturing in an attempt to stimulate our economy through job growth.

Unfortunately, storm clouds persist on the horizon as we can expect continued delay from Congress pertaining to the March 1 deadline for automatic spending cuts. To cut $85 B from the government spending, and potentially throw the economy back into recession, remains on everyones mind. In addition, there is good chance for a shutdown (short-term) of the federal government if the politicians fail to extend fiscal year 2013 stopgap spending authorization when it expires in late March. Even if compromise prevails, businesses will be cautious about whether to do more hiring and invest in plants and equipment. At this point all remain in waiting to see how March 1 unfolds. Once a definitive agreement is made business and industry will begin making more confident moves toward acquisitions, hiring, investment into infrastructure, and continued sales abroad as the world economy as a whole accelerates recession recovery.

Business investment will continue to struggle. However recent orders show a plus in 2013. Increases are forecasted at 4%, half the increase of 2012. Spending will be bolstered by the renewal of tax breaks on new or leased equipment. Orders will stagnate due to uncertainty in Congresss ability to reduce the federal deficit while increasing the federal debt limit to prevent a potential default on U.S. Treasury obligations.

Katherine Anne Doerr, Associate Analyst for Economic Analysis 18 February 2013 Sources: Bloomberg, NY Times, the Economist

The shocking contraction of GDP in 4Q2012 (-0.1%) is not as bad as it seems. Growth will continue to be subpar for some time; however this is by no means recession territory. Although this scarred some investors, they can rest assured for coming 1Q2013, as it will most likely close better than forecasted as businesses pump up inventory this quarter to help offset the beating they took 4Q2012 (which greatly contributed to national GDP decline). Moving forward, sales of cars and houses will most likely continue strong. However, other consumer spending will be trimmed due to the increase in the payroll tax that came into affect on January 1. Investors will see the most drastic upswing in GDP in the later half of this year (chugging along at a 3% growth rate). With this expected rise consumer confidence will rise in accordance to an increase in home prices and employment. Following the 6% decline in the 4Q2012 exports should pick up as Europe begins to recover.

Although a large increase in employment levels is not in our future, businesses will keep hiring a modest rate. Expected job gains in coming months will reflect the 181,000 jobs per month that were added last year. Januarys meager 157,000 job gain is the weakest we will see this year. Growth will be expected to be uniform through all industries, with retail and health care seeing the most gains. The improved housing sector bodes well for an increase in construction jobs.

We have cleared away the rubble of crisis, and we can say with renewed confidence that the state of the union is strong, Mr. Obama said in his hour-long address Tuesday night. Delivering growth and jobs will be the "North Star that guides our efforts, he added.

Mr. Obama proposed increasing the federal minimum wage to $9.50 an hour. This pay bump would mean a 24% increase in salary to $18,720 for people working 40 hours a week at minimum wage. This large increase in the minimum wage will mean one of two things, a loss of jobs and/or a rise in prices, if employers are incapable of meeting this raise in minimum wage. If approved, unintended consequences would be fewer first time jobs, and that is a bad result.