Goldman Sachs 2002 Annual Report Download - page 33

GO LDMAN SA CH S 2002 A N N UA L R EPO RT 31
Managem ent’s D iscussion and A nalysis
The U.S. economy recovered gradually from the recession
in 2001. A slowing of inventory liquidation in late 2001
led to a sharp rise in production in early 2002, but under-
lying growth in demand remained weak. Real gross
domestic product growth in the 2002 calendar year rose
to approximately 2.4% , an increase from 0.3% in 2001
but well below the pace of most recoveries. Corporations
remained cautious and investment continued to decline,
while consumer and housing spending held up relatively
well. Concerns about the quality of corporate earnings
and the extent of the economic recovery prompted fur-
ther declines in U.S. equity markets. Despite a rebound
near year end, major indices ended the year well below
2001 year-end levels. After cutting overnight interest
rates aggressively during 2001 (25 basis points of which
fell in the first month of our 2002 fiscal year), the U.S.
Federal Reserve left rates unchanged until November
2002, when renewed signs of economic weakness
prompted a 50 basis point cut in the overnight lending
rate. Long-term yields remained low, as evidenced by the
10-year U.S. Treasury yield hitting its lowest level in
40 years in October 2002.
The European economy remained weak in 2002, with the
German economy showing particular weakness. An ini-
tial rise in business confidence in early 2002 did not
translate into a meaningful recovery in activity. Real
gross domestic product growth in Europe for the 2002
calendar year was approximately 1.1%, lower than the
1.6% recorded in 2001. European equity markets
recorded particularly sharp declines through the year.
The European Central Bank and Bank of England left
interest rates unchanged throughout our 2002 fiscal year,
but in response to continued economic weakness, the
European Central Bank lowered interest rates by 50 basis
points shortly after the end of our fiscal year.
In Japan, economic growth accelerated in the first half of
2002, but appears to have decelerated towards the end of
2002. Export demand and industrial production
rebounded quite strongly in the middle of 2002, driving
overall growth rates positive, as global demand
improved and an improvement in other Asian economies
lifted Japanese exports. In addition, consumer spending
held up relatively well, despite falling personal incomes.
The Bank of Japan continued to provide substantial
liquidity by expanding purchases of government bonds
and increasing money market operations, but concerns
lingered as to the state of Japan’s banking system and
budget deficit. Equities markets in Japan rose early in
2002 but fell sharply as the outlook for a sustained
recovery receded.
Growth in other Asian economies picked up sharply in
late 2001, reflecting an improvement in technology
demand in the United States and, in some countries, an
increase in domestic spending. Export growth decelerated
later in 2002, leading to renewed pressure on some
economies, but the region generally remained stronger
than other areas. China, in particular, has continued to
record strong growth and its strength has benefited other
regional trading partners. Despite large falls in global
equities markets, most Asian equity markets (outside of
Japan) performed better than those in other regions.
RESULTS OF OPERATIONS
The composition of our net revenues has varied over time
as financial markets and the scope of our operations have
changed. The composition of net revenues can also vary
over the shorter term due to fluctuations in U.S. and
global economic and market conditions. Over the last two
years, we have been operating in a challenging economic
and business environment. Industry-wide declines in the
volume of equity underwritings and mergers and acquisi-
tions have adversely affected the results of our
Underwriting and Financial Advisory businesses, and con-
tinued weakness in global equities markets has adversely
affected the results of certain of our Trading and Principal
Investments businesses. In addition, our operating results
have been affected by Goldman Sachs’ combination with
SLK LLC (SLK) in October 2000. As a result, period-to-
period comparisons may not be meaningful.