2007 U.S. Economic and Interest Rate Outlook from UMB CIO Bill Greiner

The following analysis and opinion has been developed by UMB Chief Investment Officer Bill Greiner and UMB Investment Advisors, a division of UMB Financial Corporation (NASDAQ: UMBF).

The Author

Bill Greiner has spent his entire career in the investment field, with more than 27 years of investment management experience. Greiner was named Business Week “Fearless Forecaster: 2005 Stock Market Strategist of the Year” in December 2005. He received this distinction by being the investment strategist who most accurately forecasted where the U.S. markets would end up at the close of 2005.

Opening Remarks

Our current theme calls for the U.S. economy to grow at a slower than “normal” rate. We predict low inflationary pressure and a benign Federal Reserve with interest rates remaining stagnant or decreasing. Also, we are calling for a slowing in overall corporate profit growth rates.

Normally during this type of environment, the U.S. financial markets perform well, and we foresee no exception occurring at this time. Our outlook is positive, as we believe the nation’s investors will experience slow growth coupled with low inflationary pressure. We expect the U.S. stock market to provide positive returns during 2007, but the picture may become cloudy as the year unfolds.

The “Big Question”

The “big question” to answer in 2006 involved the Federal Reserve’s activity – when was the Fed going to stop raising interest rates? We believe the “big question” for 2007 involves the weakened state of the U.S. economy. How weak will the economy be in 2007? Will a recession ensue during the year? What are the pressures that need to be monitored? What will happen to corporate profits? All of these issues tend to center not on the cost of capital (Fed activity), but rather the economic momentum we are currently facing and the degree of weakness that may unfold in coming year.

Why are we convinced the economy is going to grow at a slower-than-normal rate during 2007? The index of Leading Economic Indicators (LEI) reveals that the economy has, in general, been losing steam since 2004. Recent readings (year-over-year) were up a scant .3%, down from a 9% reading some 30 months ago. The continued downward trend of the LEI suggests growth should be tepid in the near term.

However, this does not answer the question of what may happen in 2007. The weakness in the housing market, in our opinion, will spill over toward the “core” of consumer spending and slow various forms of consumer discretionary activity. We foresee unemployment rising through much of 2007, as layoffs in the construction industry become commonplace. However, unemployment and consumer spending will not become so weak as to incite a true recessionary contraction within the U.S. Rather, we believe all of this will lead to an uninspiring growth rate in consumer spending. This in turn should lead to an overall mild growth profile for U.S. GDP. Just how slow will the growth rate become? This, in our minds, is the big question the markets will face during 2007.

Is the housing market downturn over?

Some forecasters believe that the slight slowdown in the housing market is complete, and the economy is going to reaccelerate its growth rate over the next few quarters. These forecasters are calling the housing correction a temporary phenomenon, one that will pass in time with little pain. While we hope this is the case, we are not certain that we have sufficient data to put this behind us.

Why Worry?

Why is the housing market so important? Simply put, consumer spending represents roughly 70% of overall economic power. The single largest discretionary spending item for most consumers is housing. The labor market holds the key to whether housing activity will unravel and push the economy closer to recession. As long as homeowners have jobs, then most can keep paying their mortgage, regardless of what happens to house prices. If employment falls, it becomes a different story. There would be more forced selling of homes into an already weak market, potentially triggering a downward spiral. Meanwhile, a weak job market would also undermine income growth and thus consumer spending. Therefore, not only will the housing market, but also the labor market will be key to the strength of the economy.

Capital Spending – Continues to Roll Along

Capital spending and subsequent increases in productivity trends have been among the drivers of higher than normal overall economic growth for a number of years. The fundamental building blocks are still largely in place, but on a cyclical basis, it appears the overall growth in this data series is becoming stretched. Recently, ISM data indicates that purchasing managers are becoming more conservative in their outlooks regarding the industrial side of the economy. While we are currently seeing a deceleration in overall economic power, capital spending, as measured by Growth of Nonresidential Fixed Investment, is having a very strong year.

Fed Activity

If our outlook for overall slower-than-trend macro growth occurs during 2007, and we avoid outright recession, what activity do we expect from the Federal Reserve? Following a period of rising interest rates, which occurred over a two-year timeframe, Fed policy has moved into a “hold” status. On the one hand, inflation trends are a little stronger than the Fed would currently like to see. On the other hand, economic growth is decelerating, with much of the growth currently centered in the housing and auto markets. If our outlook for continued growth deceleration is reasonable, it follows suit that Fed activity may indeed move from the current “hold” status to one of ease, with the Fed eventually lowering interest rates. Indeed, this is our base case, that the Fed, during 2007 will eventually start to lower interest rates as growth in the overall economy decelerates.

There are two routes which may lead the Fed to lower interest rates, both of which are consistent with a growth “moderation” (soft landing) scenario. One route features a rise in unemployment, which in the past has always prompted Fed easing. The other route focuses on a rapid acceleration in disinflation pressure, which would effectively move the “real” rate of Fed funds well into the territory of being repressive in nature. With final demand growth maintaining a positive position during 2007, we believe the catalyst that should move the Fed to an easing posture is probably a rise in unemployment.

Rising unemployment would be signaled by the increase in jobless claims and/or a drop in payroll gains to less than 100,000 per month. Other gauges of labor demand might also deteriorate. We also expect continued sluggish growth in real consumer spending, which is historically consistent with a rise in unemployment. Normally, during this type of period, industrial activity (see Capital Spending above) tends to slow.

We believe the probability of the U.S. economy slowing and unemployment rising to 4.75% is reasonably high. We expect the Fed to start cutting interest rates by the end of the first half of 2007.

Economic Summary – Outlook for 2007

In summary, stresses are occurring within the U.S. economy due primarily to the housing market contraction, which should drive consumer discretionary spending to slow during 2007. This, in turn, should slow overall final demand within the economy, bringing about slowing growth within the capital spending picture. Additionally, we expect unemployment to rise in 2007. On the positive side of the equation, inflationary pressures are subsiding, due to our outlook of rising unemployment trends and slowing final demand growth. In summary, we expect GDP growth to slow to the 2.0% - 2.5% range for all of 2007. Inflation should be calm and the financial markets (stock and bond) should be reasonably well behaved during at least the first half of 2007.

Products offered through UMB Investment Advisors are: not insured by the FDIC or any other government agency; not a deposit or other obligation of, or guaranteed by, UMB Bank; subject to investment risks, including the possible loss of the principal invested.

UMB Investment Advisors is a division within UMB Bank, n.a., that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts, and individuals. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation.

The opinions and forecasts are based on information and sources of information deemed to be reliable, but UMB Investment Advisors does not warrant the accuracy of the information that this opinion and forecast is based upon. Further, the information and opinions contained within this report is subject to change at any time without notice and should not be construed as investment advice or recommendation of any specific security or sector.

The UMB Scout Funds are distributed by UMB Distribution Services, LLC, an affiliate of UMB Financial Corporation, and managed by Scout Investment Advisors, Inc., a subsidiary of UMB Bank, n.a.

You should consider the Funds’ investment objectives, risks, charges and expenses carefully before investing.

For a prospectus, that contains this and other information about the Funds, call 800-996-2862 or visit http://www.umbscoutfunds.com/

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