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U.S. EXECUTIVE SUMMARY JULY 2009

The Road to Recovery Forecast Highlights •

A bottom is in sight for output, though not for employment. We expect GDP to grow—albeit slowly—in the second half of the year, but not strongly enough to stabilize employment until 2010.

•

Recovery is expected to be slow, since credit conditions will stay tight. The economy contracts 2.8% during 2009, before growing 1.5% in 2010. The unemployment rate reaches 10.3%.

•

Inflation remains a risk for the future, but is not an imminent threat. Headline CPI inflation is in negative territory and wage inflation is falling, not rising.

•

Ten-year Treasury yields flirted with 4% in June as fears for the economy diminished, but have since moved lower again. We think that it is too soon for a major bear market in bonds.

The Forecast in Brief The road to recovery will be a long one, but the first

steps are being taken. We expect the rate of contraction in GDP to have slowed in the second quarter to minus 2.1%, from minus 5.5% in the first quarter. In the second half of

the year, the inventory cycle will begin to turn and we expect to see GDP moving higher. But a rapid recovery is not in prospect, after so extreme a financial shock. The unemployment rate is not likely to peak until some time in the first half of 2010, at around 10.3%. As is characteristic of a turning point in the economy, the incoming indicators are a mixed bag, and it is getting harder for them to beat expectations. The June employment report was a disappointment, showing more jobs lost than in May, though we still expect employment losses to gradually ease during the second half of the year. Up to now, indicators have mostly pointed to an economy contracting, just less sharply than before. As we move into the second half of the year, indicators should increasingly point to growth. The latest manufacturing ISM

report for June showed both orders and production indicators at around the breakeven 50 mark, along with a very severe contraction in inventories. This combination is setting the stage for an upturn in manufacturing production during the third quarter, as some industries (notably automobiles) will need to increase production to prevent inventories from running down too far.

GDP Growth Resumes in Second-Half 2009

Inventory Swings Driving the Growth Pattern

(Annualized percent change) 6 4 2 0 -2 -4

(Inventories, percentage point contribution to GDP growth)

-6 -8 2007

3 2 1 0 -1 -2 -3

2008 2009 Real GDP

2010 2011 Real Final Sales

Contacts: Nariman Behravesh, 781-301-9101, [email protected] Nigel Gault, 781-301-9093, [email protected] IHS Global Insight Web Site, http://www.ihsglobalinsight.com (C) Copyright 2009. ALL RIGHTS RESERVED

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U.S. ECONOMIC SERVICE

Executive Summary

National Income Accounts Revision Alert The Bureau of Economic Analysis (BEA) will publish a comprehensive revision of the national income accounts with the release of second-quarter GDP figures on July 31. Among other changes, the revision will change the reference year for the accounts to 2005 from 2000, and will introduce a new classification scheme for consumer spending. Incorporating these revisions into our model and forecast will delay the release of our August forecast. The

exact timing of the forecast will depend on how quickly complete BEA data become available, but as of now we hope to release the August forecast on Monday, August 17, and publish the Executive Summary on Wednesday, August 19. These dates are one week later than they would have been without the comprehensive revision.

The inventory cycle will be the key to the growth profile in 2009. Inventories took more than 2 percentage points out of first-quarter GDP growth, but inventory/sales ratios have barely begun to adjust, and we expect inventories to be a severe drag on growth again in the second quarter. Only in the second half of the year, as the rate of inventory decline slows, will the inventory cycle become a plus for growth. At that point, real GDP begins to expand even though final sales are still declining.

gage rates will now test this stability. We expect housing starts to hit bottom in the second quarter of 2009, at just 506,000 units (annual rate), and to improve gradually thereafter. House prices will take longer to stabilize. We expect the FHFA house price index to drop 9.2% from the fourth quarter of 2008 to the fourth quarter of 2009, and another 6.3% by the fourth quarter of 2010.

The consumer is still under stress. Consumer spending essentially moved sideways in the second quarter, edging down an estimated 0.3% from the first quarter. Reduced tax withholding and one-time payments to Social Security recipients raised incomes, but boosted saving rather than spending. And rising gasoline prices have squeezed spending power. Given reduced household wealth, debt overhangs, and still-tight credit, it is hard to make a case for a robust consumer recovery, but we do expect spending to gradually improve over the rest of the year as the labor market deterioration becomes progressively less severe. Spending falls 0.6% in 2009 and rises 1.6% in 2010. Lightvehicle sales fall to 9.8-million units in 2009, from 13.1million units in 2008, before improving to 11.3 million in 2010.

12.2%, about one-third the rate of decline seen in the first quarter. The bellwether demand indicator—nondefense capital equipment orders excluding aircraft—appears to have stabilized. We expect equipment spending to begin its recovery in the second half of the year. For 2009 overall, we foresee an 18.5% drop in equipment spending, followed by a 7.5% increase in 2010.

Until the housing market stabilizes, it will be impossible to draw a line under the financial crisis. Rising unemployment and reduced household wealth are damaging, but lower home prices and mortgage rates are making housing look much cheaper—for those who can qualify for credit. Most key indicators of housing activity (home sales, housing starts, and permits) are showing signs of stabilization, at least for single-family units. The recent retreat in mort-

July 2009

Business investment is still falling, but less steeply. We expect second-quarter equipment spending to drop

On the business structures side, the outlook is mixed. Total structures spending—aside from drilling activity— probably rose in the second quarter, but the gains were narrowly based in oil refining and power generation. The trend for commercial construction such as retail developments, offices, and hotels remains downward. We expect declines in private nonresidential building to resume in the third quarter of 2009 and extend through the third quarter of 2010. The average spending decline is 12.2% in 2009 and 18.0% in 2010. Drilling activity in the energy sector fell steeply in the first half of the year, but should stabilize in the second half with energy prices bottoming out. In the state and local government sector, tax revenues are down sharply, while financing has become more expensive. Real state and local government purchases began to decline in the fourth quarter of 2008. We expect them to

U.S. ECONOMIC SERVICE

Executive Summary

roughly stabilize by midyear, but only because of federal support for current and capital spending that we estimate at $171 billion over calendar years 2009 and 2010. The full fiscal stimulus package is valued at around $787 billion over 10 years, and we assume that $561 billion of this is injected during the first two calendar years. The stimulus adds about 0.9 percentage point to 2009 GDP growth and 1.2 percentage points to 2010 growth, and creates or saves just under 2.5-million jobs by the fourth quarter of 2010. But the peak-to-trough decline in employment is still well above 7 million. The stimulus package, financial bailout costs, and recession will take the federal budget deficit to $1.6 trillion in 2009 and $1.2 trillion in 2010. Beyond the recession, President Obama will face tough choices about his spending priorities, and taxes must eventually rise. Failure to act on the deficit does not necessarily mean that inflation would surge—but would guarantee that interest rates go much higher. The global recession has hit exports hard. They plunged at a 30.6% annual rate in the first quarter. Although there are now signs that world trade is beginning to stabilize, we do not expect the U.S. recovery to be export-led. Apart from China, which has injected massive fiscal stimulus, recovery should come more slowly to the rest of the world. This means that the trade gap will widen later this year, as imports pick up before exports, and will act as a brake on the recovery, at least in its initial phases. The dollar has started to weaken again as its safe-haven bid has diminished. We still see its long-term trend as downwards. The current-account deficit should fall by about one-third in 2009 (from $706 billion to $478 billion), almost entirely because of a $215-billion plunge in the bill for imported oil. We expect the deficit to widen again in 2010. Rising commodity prices have eased fears of deflation, and there is talk of inflation risks as some investors view the magnitude of monetary and fiscal stimuli with alarm. We think that some commodity prices—notably oil—have moved in advance of the fundamentals, and see some correction as likely. In addition, we see too much excess capacity in product markets and, especially, in the labor market for an inflation spiral to take hold any time soon. In

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the current quarter, we expect headline CPI inflation to be minus 2.0% year-on-year, largely on lower energy costs. We expect core consumption price inflation to soften and bottom out at 1.1% in the second quarter of 2010, near the bottom of the Federal Reserve’s 1-2% comfort zone. Bond yields moved much higher in June, into the 3.75-

4.00% range for 10-year Treasuries, on a combination of reduced safe-haven demand, indigestion over heavy bond issuance, worry over future budget deficits, and concern over long-term inflation risks. Although we do see bond yields heading substantially higher over the long term, we think it is too early for a major bear market to begin, since we see the economy as too weak and inflation as too distant a threat. Markets appear to have taken the same view, and yields slipped back to around 3.5% in early July. Inflation is a valid long-term threat, though, and will require “exit strategies” from both monetary and fiscal stimuli. But there is sufficient time available to plan a way out. We do not expect the Federal Reserve to begin to raise interest rates until the second half of 2010. The more difficult problem will be for the federal government to deal with the budget deficit.

The Recovery: Different Shape, Different Strength, and Different Timing—Depending on Where You Are in the World While there is a growing consensus that the recovery is “just around the corner,” there has been little discussion of the rather disparate patterns of recovery in various parts of the global economy. The shape, strength, and timing of each recovery depends on a variety of factors, including: 1) resolution (or lack thereof) of crisis-related banking problems, 2) the robustness of the policy response to the crisis, 3) the level of private sector debt that needs to be worked off, and 4) the relative dependence on domestic demand versus exports. Although major forces of recovery are in place—lower commodity prices, bank rescue packages, massive fiscal and monetary stimulus, and growing pent-up demand—there are also significant headwinds that are likely to threaten the robustness and durability of the recovery in each of the key world economies. United States: Major Headwinds Will Make for a SlowStarting Recovery. Arguably, the United States is one of

IHS Global Insight

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U.S. ECONOMIC SERVICE

Executive Summary

the economies where the recovery forces are the strongest. Nevertheless, there are major headwinds that will keep the pace of recovery very modest through the middle of next year. In the case of consumer spending, rising unemployment and attempts by households to rebuilt their saving balances mean that consumer spending will grow by just 1.5-2.0% in the next few years. Similarly, even though there are very early signs of stabilization in the housing market, house prices are still falling (albeit at a slower pace) and the inventory of unsold homes is still historically high (albeit declining a little recently). IHS Global Insight expects that the housing sector will begin a sustained recovery in the current (third) quarter. The picture for capital spending is equally mixed. Business fixed investment in equipment will likely recover in the second half of this year, but the contraction in business construction is probably going to last through the middle of next year. Our forecast also assumes that U.S. exports will resume growth by the end of this year as economic activity recovers in other parts of the world. If rest-of-world growth remains weak, however, then the prospects for U.S. growth will be dimmer. Finally, notwithstanding the anxiety about the risk of higher inflation (due to unprecedented monetary and fiscal stimulus), a bigger risk for the United States is the possibility that, once the stimulus begins to wear off, the private sector will not be able to pick up the slack. Eurozone: An L of a Recovery. There are growing fears that not only will the recovery in the Eurozone occur one to two quarters later than in the United States, but that it will be extremely weak. A variety of factors are contributing to this bleak picture. First, the recession is much deeper than the American one, because of the much greater dependence on exports. Since the U.S. consumer is no longer expected to be the locomotive of global (export-led) growth, the drag on the Eurozone could be sizable. Second, banking problems in Europe are as bad, if not worse, than in the United States (thanks to bad loans to Emerging Europe)—and, crucially, European governments are not nearly as far along in resolving these problems as their American counterparts. Third, the fiscal and monetary stimulus in the Eurozone has

July 2009

been much more cautious than that provided by the Obama administration and the Fed. Recent data are particularly worrisome. The unemployment rate has reached a 10-year high of 9.5% on its way to 11% or even higher. Meanwhile, the CPI has moved into deflation territory (minus 0.1% in June). IHS Global Insight now expects that the Eurozone economy will contract by 4.6%—with positive growth no earlier than the fourth quarter—and barely show signs of life next year (0.1%). Even in 2011, growth is expected to pick up to only 1.4%. Japan: Another “Lost Decade”? The Japanese economy

probably hit bottom in the early spring. In April, both exports and industrial production rebounded. Nevertheless, we expect both the second and third quarters to be flat. Domestic demand remains weak, with fixed investment and construction falling, and consumer spending moving sideways. Capital expenditures have fallen 21% compared with a year ago. Deflation still plagues the Japanese economy. Consumer prices (excluding food) fell a record 1.1% in May. While the government has promised large amounts of fiscal stimulus, in reality it is only likely to amount to 2.02.5% of GDP, spread over two years. We expect Japanese real GDP to fall a whopping 6.8% this year, before growing 0.9% next year. Continued structural problems in Japan (deflation, excess capacity, poor productivity growth, and slow progress on structural reforms) mean that the risks of an extended period of anemic growth are high. China: Risk of a W. While China has been the first major economy to “come off the bottom,” the recent softening of exports suggest that all is not well. In fact, after rebounding strongly, China’s purchasing managers’ index (PMI) has begun to flatten out in the past couple of months. The large government stimulus program has had a strong impact on capital spending, but almost no impact on retail sales and consumer spending. The liquidity injections into the economy (through massive loan expansions) have helped but are beginning to moderate. We continue to believe that China can grow 6.9% this year, 8.2% next year, and 9.0% in 2011. Nevertheless, the biggest risk for China is a Wshaped cycle in which growth falters when the massive stimulus wears off, consumer demand does not grow rapidly (it has been a lagging sector in recent years), and exports do not resume their high double-digit growth rate—an

U.S. ECONOMIC SERVICE

Executive Summary

unlikely prospect given the weak recovery in most of the G-7 economies Bottom line: it will be a few years before the world growth returns to pre-crisis levels. This does not bode well for export-led growth in the United States.

Key Forecast Assumptions Fiscal Policy: The government’s stimulus package has a face value of around $787 billion over 10 years. We assume that $561 billion of stimulus is injected during the first two calendar years. The $561 billion breaks down into $143 billion in tax cuts for the personal sector, $97 billion in targeted transfer payments to the personal sector (e.g., food stamps, extended unemployment insurance), $88 billion in corporate tax cuts, $149 billion in transfers to the states, and $82 billion for infrastructure and other spending. We do not count the extension of AMT relief (worth $70 billion) as stimulus, because we assume that it would have happened anyway. Beyond 2010, we expect a gradual increase in the income-tax burden, as signaled in the 2010 budget. TARP: The Treasury has $700 billion in budget authority

under the Troubled Asset Relief Program (TARP). We assume that the Treasury actually spends only $650 billion of the total, as financial market conditions have improved and the top banks have been able to source private external capital. We assume that the top banks repay about $75 billion in fiscal 2009 (small banks continue to source additional capital from the program). Of the TARP’s first tranche of $350 billion, we assume $20 billion in auto sector support and $330 billion of capital support for the financial system. Of the $300 billion assumed spent out of the second tranche, we allocate $37 billion for auto sector support, $75 billion for the housing plan, and $188 billion for the financial sector. Cash-for-Clunkers: We have assumed that the Car

Allowance Rebate System (better known as “Cash-forClunkers”) gives a modest and temporary net boost of 150,000 to new vehicle sales in the second half of 2009. The plan is too restrictive and the financial situation of

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potential beneficiaries too weak to justify a bigger impact. After rounding, the change raises our light-vehicle sales forecast for 2009 to 9.8 million from 9.7 million. Oil Price Raised, But Some Correction Still Assumed:

We believe that demand is too weak to keep the price at around $70/barrel, where it ended June. We assume the price of West Texas Intermediate averages $59.50/barrel in the second half of 2009 (instead of $51, as assumed last month). We assume the price averages $64 per barrel in 2010 (instead of $56/barrel) and then climbs gradually to $90/barrel by 2014. Federal Reserve to Hold Rates Near Zero: The Fed has cut its federal funds target to a range of 0.0-0.25%. We assume that this target stays in place for all of 2009, and that the Fed begins to tighten only late in the third quarter of 2010. Dollar Trading Range: The dollar rose sharply from mid-

2008 against most major currencies (with the exception of the yen), as investors sought safe havens amid market turbulence, but has slipped recently as markets have stabilized. Over the rest of 2009, we expect the dollar to stay within recent trading ranges, with end-2009 values assumed of $1.36/euro, 93 yen/dollar, and C$1.17/dollar. China has at least temporarily halted the process of renminbi appreciation due to fears for economic growth. We assume that the renminbi will appreciate just 1.3% against the dollar over the coming 12 months. Global Recession: We project GDP in the United States’

major-currency trading partners to decline 3.5% in 2009, before rising 1.1% in 2010. GDP for other important trading partners is also projected to decline in 2009, by 2.3%, before rebounding 3.4% in 2010. Defense Spending Growth Expected to Slow: Real fed-

eral defense purchases rose 7.2% in calendar 2008, but we expect a smaller 3.2% increase in 2009 and a 1.0% decline in 2010 as the new administration scales back defense commitments. by Nariman Behravesh and Nigel Gault

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U.S. ECONOMIC SERVICE

Executive Summary

Risks to the Forecast The economy appears to have passed the inflection point that separates a free-fall from a downturn that has a bottom in sight. Indeed, consumer spending is stabilizing, and housing is showing signs of stabilizing. Confidence has risen, and this has helped boost the S&P 500. We are not out of this yet, however. The economy is still hemorrhaging jobs. Conditions in the commercial real estate market are deteriorating. Housing prices are still falling, and delinquency rates are still rising. And output in the rest of the world is still contracting. Will we see real green shoots of recovery emerging, or are the recent positive signals a false dawn? In the pessimistic scenario, the remaining problems combine to throw the economy off the tracks again. This scenario assumes lower consumer spending, weaker business investment, slower foreign growth, and weak underlying productivity growth. It is a scenario with an even deeper recession in the near term, and slow growth afterward. In the optimistic scenario, Federal Reserve and Treasury policies turn the economy around sharply in the second half of this year. With credit once again flowing, domestic consumer and business demands are rekindled, along with global demand. The U.S. economy still experiences a serious recession, but it is milder than in the baseline forecast, and strong growth resumes from the third quarter of 2009 onward.

rates and the 10-year Treasury note yield also remains wider than normal through 2010. Oil prices are lower over the short run in this scenario because world demand is falling. As a result, bottom-line inflation is lower. Core inflation is also lower because demand is so weak. The low inflation readings give the Federal Reserve leeway to keep interest rates in the 0.00.25% target range—just as in the baseline—during 2009 and 2010. But when the economy gets off the mat, inflation starts creeping up because of rising energy prices, a slowdown in productivity, a weaker dollar, and because the Fed responds to the crisis by creating too much money. The Fed responds to rising prices by steadily raising interest rates. But its response is a bit too little, too late, and inflation continues to climb. Eventually, core inflation stabilizes—but at nearly a full percentage point above the baseline rate. In this scenario, the housing recession drags on. The median price of existing homes falls 12% below the baseline in 2010. Home sales are also much lower. Housing starts begin to turn around from record-low levels—just as in the baseline—but the rebound is sluggish, as starts drop from 900,000 units in 2008 to 546,000 in 2009 (compared with 556,000 in the baseline) and 701,000 in 2010 (compared with 865,000 in the baseline). The weakness in housing undermines consumer confidence. This, along with the drop in wealth associated with falling home prices and a slowdown in job growth, causes consumers to retrench sharply. Hit especially hard are light-vehicle sales, which fall to 8.8million units in 2009 (versus 9.8 million in the baseline).

False Dawn (20% Probability): The pessimistic scenario is

more than a recession, but not quite a depression (some economists call this gray area a “slump”). The simulation assumes that the financial crisis worsens, sending the economy into its deepest downturn since the Great Depression. Credit markets remain clogged, both domestically and across the world. Without access to credit, domestic spending contracts and the housing market falls into an even deeper hole. The pessimistic scenario assumes that the downward spiral in financial markets continues into 2010. The Treasuryeurodollar (TED) spread is still more than 100 basis points in the third quarter of 2009 (normally, it is less than 70 basis points. The spread between 30-year fixed mortgage

July 2009

Capital spending is also weaker, as firms respond to a bleaker outlook by scuttling long-term projects. Business fixed investment drops over nine straight quarters. Foreign economic growth is lower, which cuts into export growth. Indeed, real GDP among the United States’ major-currency trading partners falls over seven quarters, starting in the second quarter of 2008 (this category does not include China). As a result, exports deduct 2.0 and 0.2 percentage points from GDP growth in 2009 and 2010, respectively. Over the longer term, GDP growth remains slower than in the baseline, mainly because productivity advances only 1.4% on average over the next 10 years, compared with 1.8% in the baseline. Inflation is higher because of the slower productivity gains and a weaker dollar, and because

U.S. ECONOMIC SERVICE

Executive Summary

the Fed, after allowing inflation to creep past its comfort band (so that it eventually rises above 2.5%), decides to stabilize it at that higher level, rather than risk another recession by bringing it down. In this scenario, real GDP contracts 3.3% in 2009 and 0.9% in 2010 (compared with a 2.8% drop and a 1.5% gain, respectively, in the baseline). Employment drops for 11 straight quarters (the economy loses 8.9-million jobs), manufacturing output falls over 11 straight quarters, and real GDP drops for seven straight quarters, starting with the third quarter of 2008. Unlike the previous two recessions, those of 1991 and 2001, this one takes a heavy toll. Peak to trough, real GDP drops 5.1%—not quite enough to be called a depression (defined as a 10% peak-to-trough drop in real GDP), but much worse than the losses during the 1973-75 and 1981-82 recessions. Unlike those recessions, however, the economy emerges from this downturn weaker, and facing more troubles ahead. Green Shoots Sprout (20% Probability): In the optimistic

scenario, the rapid response of the Federal Reserve to the crisis in financial markets, coupled with the Treasury’s “rescue” plan, Congress’ stimulus package, and help from central banks abroad work, limit the downside. The recession is still a nasty one, though. There is no additional economic stimulus above the level in the baseline, but the primary difference is that the wheels of stimulus start to achieve traction more quickly, producing growth of 3.1% in the third quarter. In addition, the standard optimistic scenario assumption of stronger total factor productivity growth is also in place. Total factor productivity, a measure of how technological progress augments economic growth, is enhanced by reinvigorated innovation in the technology sector. This allows lower inflation and stronger income growth over the long term—but in the short term, a stronger economy means that inflation is higher in the optimistic scenario than in the baseline (particularly in commodities). Headline CPI accelerates to 2.9% y/y in the third quarter of 2010, as opposed to 1.8% in the baseline. The stronger sales pace during 2009 in the optimistic scenario requires less of an inventory reduction than in the baseline, with demand recovery trimming inventories back to desirable levels. Final sales fall 1.7% in 2009 in the more

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optimistic scenario, as opposed to a 2.3% drop in the baseline. With credit again flowing late this year, business fixed investment rebounds 6.5% in 2010, after suffering a severe 16.6% contraction in 2009. This compares with a steeper 18.3% drop during 2009 in the baseline forecast, and a 0.1% decline during 2010. The downturn in residential investment is also less severe in the optimistic scenario, with housing starts beginning to recover during the second half of 2009 and averaging over 596,000 units for the year, compared with a much weaker baseline level of roughly 556,000 units. This recovery is also reflected in house prices, as the FHFA housing price index posts a slimmer 5.5% drop in 2009 in the optimistic scenario. The optimistic scenario also assumes faster growth in the rest of the world, and a dollar that is initially weaker than the baseline, but later on is stronger. The dollar helps GDP early in the forecast period, but restrains it later on, as relatively weaker foreign currencies encourage import growth. Finally, we assume slightly higher energy prices in the near term due to stronger global demand, but lower prices in the longer term due to a more optimistic assumption about supply. Oil prices remain in the low $70s per barrel over the rest of 2009, rather than holding at $60/barrel in the baseline, and then gradually rise to the low $80s by the end of 2014. On net, these assumptions produce a much brighter economic outlook than the dismal pictures painted by the baseline and pessimistic scenarios. After falling 0.6% in the second quarter (compared with a 2.1% decline in the baseline forecast), real GDP undergoes a sharp turnaround, climbing 3.1% and 3.5% in the third and fourth quarters of 2009. Real GDP does even better in 2010, rising 3.1%, after shrinking 2.0% in 2009. The unemployment rate peaks near its present level (in the mid-9% range) and falls to 6.6% by late 2014. Inflation implications of the milder recession in the optimistic scenario are modest. Consumer prices fall less than in the baseline and rebound more sharply at first, but by 2011 lower oil prices and improved productivity growth bring inflation down below its baseline pace. In short, the optimistic alternative sees more-muted cycle dynamics, and a quicker turn in the cycle than the baseline. by Patrick Newport and Brendan LaCerda IHS Global Insight

U.S. ECONOMIC SERVICE

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Executive Summary

Forecast at a Glance Steep Declines in Exports and Business Investment (Percent change from a year earlier)

GDP Trough Approaching (Real GDP, percent change from a year earlier) 6

20

4

10

2

0

0 -10

-2

-20

-4 -6 2003

2005

2007

2009

2011

2013

-30 2003

2005

2007

Real Exports

2009

2011

2013

Real Fixed Business Investment

Housing Starts Nearing Bottom

Consumer Climate Has Changed (Real consumer spending, percent change from a year earlier) 5

2.0

9

1.6

8

2

1.2

7

1

0.8

6

0.4

5

4 3

0 -1 -2 2003

2005

2007

2009

2011

2013

0.0 2003

4 2005

2007

2009

2011

2013

Single-Family Starts (Left scale, million units) 30-Year Mortgage Rate (Right scale, percent)

Headline Prices Falling in 2009

Fed Holds Rates Near 0%

(Consumer prices, percent change from a year earlier)

(Percent)

6

6

4

5 4

2

3 0

2

-2 -4 2003

1

2005

2007

Overall Index

July 2009

2009

2011

2013

Core Index

0 2003

2005

2007

Federal Funds Rate

2009

2011

2013

10-Year T-Note Yield

U.S. ECONOMIC SERVICE

Executive Summary

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TABLE 1

Monthly Economic Indicators May. 2008 Industrial Markets Industrial Prod. Total (2002=100.0) Percent Change Percent Change Year Earlier Capacity Utilization, Manufacturing (%) Unemployment Rate (%) Payroll Employment (Mil.) Change (Mil.) Leading Indicator (1992=1.000) Percent Change New Orders, Mfg. (Bil. $) Percent Change Inv. Chg., Mfg. & Trade (Bil. $) Merchandise Trade Bal. (Bil. $)

Jun. 2008

Nov. 2008

Dec. 2008

Jan. 2009

Feb. 2009

Mar. 2009

Apr. 2009

May. 2009

2006

2007

2008

110.7 110.4 104.8 102.4 100.2 99.4 97.6 96.9 95.8 109.7 111.3 108.8 -0.3 -0.2 -1.3 -2.3 -2.1 -0.8 -1.8 -0.7 -1.1 2.3 1.5 -2.2 -0.4 -0.7 -6.5 -8.9 -10.8 -11.3 -12.6 -12.7 -13.4 76.7 76.3 71.1 69.0 67.1 67.1 65.9 65.6 65.0 79.4 79.0 75.1 5.5 5.6 6.8 7.2 7.6 8.1 8.5 8.9 9.4 9.5 4.6 4.6 5.8 137.517 137.356 135.755 135.074 134.333 133.652 133.000 132.481 132.159 131.692 136.098 137.604 137.046 -0.137 -0.161 -0.597 -0.681 -0.741 -0.681 -0.652 -0.519 -0.322 -0.467 2.398 1.507 -0.558 1.020 1.021 0.990 0.989 0.986 0.982 0.979 0.990 1.002 1.043 1.040 1.011 -0.1 0.1 -0.6 -0.1 -0.3 -0.4 -0.3 1.1 1.2 1.5 -0.3 -2.8 450.0 459.6 377.2 358.8 346.1 348.5 341.9 343.8 347.9 419.9 427.7 428.3 0.9 2.1 -6.5 -4.9 -3.5 0.7 -1.9 0.5 1.2 6.2 1.9 0.1 0.6 8.8 -14.6 -21.6 -17.7 -19.9 -18.1 -15.6 84.2 55.7 9.0 -72.2 -71.5 -52.5 -51.9 -46.5 -36.0 -37.7 -38.9 -828.0 -808.8 -816.2

Consumer Markets Disposable Income (Bil. 2000$) Percent Change Personal Income (Bil. $) Percent Change Personal Saving Rate (%) Consumer Expenditures (Bil. $) Percent Change Retail Sales (Bil. $) Percent Change Non-Auto. Retail Sales (Bil. $) Percent Change New Light-Vehicle Sales (Mil.) Housing Starts (Mil.) New Home Sales (Mil.) Existing Home Sales (Mil.) Chg. Consumer Install. Credit (Bil. $)

9119 5.2 12220 1.8 4.8 10144 0.7 375.9 0.0 307.2 0.4 14.2 0.971 0.509 4.950 6.6

8886 -2.6 12234 0.1 2.5 10196 0.5 376.7 0.2 309.7 0.8 13.6 1.078 0.488 4.900 8.6

8771 0.8 12112 -0.4 3.1 9940 -0.7 347.7 -2.1 290.1 -2.2 10.1 0.655 0.390 4.540 -9.3

8805 0.4 12084 -0.2 4.0 9831 -1.1 336.4 -3.2 279.9 -3.5 10.3 0.556 0.374 4.740 -6.5

8912 1.2 12083 0.0 4.6 9921 0.9 342.0 1.7 284.0 1.4 9.5 0.488 0.329 4.490 4.8

8873 -0.4 12048 -0.3 4.1 9960 0.4 343.4 0.4 287.0 1.1 9.1 0.574 0.354 4.710 -10.9

8876 0.0 12015 -0.3 4.3 9935 -0.3 339.2 -1.2 284.0 -1.1 9.8 0.521 0.335 4.550 -16.6

8984 1.2 12094 0.7 5.6 9936 0.0 338.4 -0.2 283.4 -0.2 9.3 0.454 0.344 4.660 -15.7

9125 1.6 12261 1.4 6.9 9961 0.3 340.0 0.5 284.7 0.5 9.9 0.532 0.342 4.770

Prices and Wages CPI, All Urban Consumers Percent Change Year Earlier Core Cons. Price Defl. (2000=100.0) Percent Change Year Earlier PPI, Finished Goods Percent Change Year Earlier PPI, Industrial Commodities (NSA) Percent Change Year Earlier Avg. Private Hourly Earnings ($) Percent Change Year Earlier West Texas Int. Crude Oil ($/bbl.) Percent Change Year Earlier Henry Hub Spot Natural Gas ($/mmbtu) Percent Change Year Earlier

2.150 4.0 116.7 2.2 1.786 7.3 2.000 13.6 17.99 3.7 125.39 97.6 11.21 47.1

2.170 4.8 117.1 2.3 1.810 9.0 2.040 15.6 18.04 3.6 133.93 98.5 12.69 72.6

2.133 1.0 117.8 2.0 1.728 0.1 1.784 -1.9 18.34 3.9 57.44 -39.4 6.69 -6.3

2.116 -0.1 117.7 1.8 1.697 -1.2 1.723 -4.6 18.40 3.9 41.43 -54.7 5.83 -18.3

2.122 -0.2 118.0 1.7 1.712 -1.3 1.726 -5.6 18.43 3.7 41.74 -55.1 5.23 -34.5

2.130 0.1 118.3 1.8 1.713 -1.6 1.709 -7.4 18.46 3.5 39.16 -58.9 4.52 -47.2

2.127 -0.4 118.5 1.8 1.693 -3.6 1.695 -10.9 18.50 3.4 47.98 -54.5 3.94 -58.3

2.127 -0.6 118.8 1.9 1.698 -3.5 1.698 -12.4 18.50 3.1 49.79 -55.8 3.50 -65.5

2.129 -1.0 118.9 1.8 1.702 -4.7 1.712 -14.4 18.53 3.0 59.16 -52.8 3.83 -65.8

1.98 1.73 5.00 5.57 3.88 6.04 1374 0.0 7637 0.2

2.00 1.86 5.00 5.68 4.10 6.32 1384 0.7 7648 0.1

0.39 0.19 4.00 6.15 3.53 6.09 1524 3.3 7952 0.6

0.16 0.03 3.61 5.05 2.42 5.33 1595 4.7 8124 2.2

0.15 0.13 3.25 5.05 2.52 5.06 1576 -1.2 8210 1.1

0.22 0.30 3.25 5.27 2.87 5.13 1560 -1.1 8242 0.4

0.18 0.21 3.25 5.50 2.82 5.00 1562 0.2 8317 0.9

0.15 0.16 3.25 5.39 2.93 4.81 1592 1.9 8264 -0.6

0.18 0.18 3.25 5.54 3.29 4.86 1596 0.2 8328 0.8

79.5 0.5 -8.5 78.3 0.3 -8.7

79.8 0.4 -8.0 78.4 0.2 -8.6

91.0 2.4 11.7 92.3 3.4 14.6

89.5 -1.6 8.5 92.1 -0.2 12.8

90.1 0.6 10.1 93.8 1.8 15.5

92.6 2.8 14.1 96.6 3.1 19.7

93.5 0.9 17.9 97.5 0.9 24.4

91.0 -2.7 15.0 94.5 -3.1 21.1

88.0 -3.2 10.7 91.1 -3.6 16.4

Financial Markets Federal Funds Rate (%) 3-Month T-Bill Rate (%) Commercial Bank Prime Rate (%) Moody’s Aaa Corp. Bond Yield (%) 10-Year Treasury Note Yield (%) Conv. Mortgage Rate, FHLMC (%) M1 Money Supply (Bil. $) Percent Change M2 Money Supply (Bil. $) Percent Change Trade-Weighted US$, 18 Countries Morgan Guaranty Index (1990=100.0) Percent Change Percent Change Year Earlier Real Morgan Guaranty Index Percent Change Percent Change Year Earlier

Jun. 2009

9.7

18.53 2.7 69.68 -48.0 3.81 -70.0

5.61

8407 3.5 10994 7.1 0.7 9207 5.9 4294.5 5.3 3394.6 6.3 16.5 1.812 1.049 6.516 102.5

8644 2.8 11663 6.1 0.6 9710 5.5 4435.8 3.3 3527.9 3.9 16.1 1.342 0.769 5.674 131.3

8753 1.3 12101 3.8 1.8 10058 3.6 4404.7 -0.7 3615.7 2.5 13.1 0.900 0.481 4.893 43.3

2.016 3.2 112.1 2.3 1.603 2.9 1.688 5.4 16.75 3.9 66.10 17.1 6.74 -23.5

2.073 2.9 114.5 2.2 1.666 3.9 1.751 3.8 17.43 4.0 72.28 9.3 6.98 3.6

2.152 3.8 117.0 2.2 1.773 6.4 1.923 9.8 18.08 3.8 99.61 37.8 8.85 26.8

4.96 4.73 7.96 5.59 4.79 6.41 1374 -0.6 6840 5.3

5.02 4.35 8.05 5.56 4.63 6.34 1370 -0.1 7233 5.5

1.93 1.37 5.09 5.63 3.67 6.04 1423 15.9 7719 9.2

89.3 -1.2

85.9 -3.8

82.8 -3.5

88.4 -2.0

85.0 -3.9

82.5 -3.0

IHS Global Insight

10

U.S. ECONOMIC SERVICE

Executive Summary

TABLE 2

Summary of the U.S. Economy 2008:4

2009:1

2009:2

2009:3

2009:4

2010:1

2010:2

2010:3

2010:4

2011:1

2011:2

2011:3

2011:4

Composition of Real GDP, Percent Change, Annual Rate Gross Domestic Product -6.3 -5.5 Final Sales of Domestic Product -6.2 -3.3 Total Consumption -4.3 1.4 Durables -22.1 9.5 Nondurables -9.4 -0.4 Services 1.5 0.9 Nonresidential Fixed Investment -21.7 -37.3 Equipment & Software -28.1 -33.7 Information Processing Equipment -22.8 -18.4 Computers & Peripherals -38.7 -10.8 Communications Equipment -32.1 -29.3 Industrial Equipment -14.7 -47.4 Transportation equipment -70.0 -74.6 Aircraft 38.1 -65.6 Other Equipment -23.0 -33.4 Structures -9.4 -42.9 Commercial & Health Care -21.9 -34.7 Manufacturing 10.5 49.7 Power & Communication -2.0 -23.5 Mining & Petroleum 2.4 -78.1 Other -17.1 -29.7 Residential Fixed Investment -22.7 -38.8 Exports -23.6 -30.6 Imports -17.5 -36.4 Federal Government 6.9 -4.4 State & Local Government -2.0 -2.2

-2.1 -0.6 -0.3 -5.3 -2.5 1.6 -12.6 -12.2 -8.2 5.8 -16.6 -24.6 81.4 5.2 -35.5 -13.4 -14.8 51.2 69.0 -76.1 8.2 -23.3 -11.8 -17.5 8.4 -1.7

0.6 -1.6 1.9 4.9 2.2 1.3 -8.0 -4.5 -1.8 -3.4 -0.7 -29.5 54.4 1.7 -9.5 -14.0 -18.2 -23.0 8.9 -13.0 -19.2 -6.5 -1.1 18.5 5.5 -0.6

1.1 -0.7 1.4 -1.6 3.1 1.0 -5.1 6.1 5.6 10.3 1.2 -11.6 71.2 32.9 -4.6 -23.2 -18.3 -39.9 -15.9 -23.3 -24.3 4.1 3.9 14.4 2.3 -0.2

1.4 0.7 1.3 0.1 2.5 1.0 4.3 12.2 7.1 -6.9 16.3 6.3 65.1 33.4 6.1 -10.0 -18.2 -40.0 -26.4 133.1 -21.4 9.1 4.6 11.3 1.3 0.3

2.7 2.2 1.8 1.9 2.7 1.4 0.5 10.9 12.3 31.1 16.9 14.7 4.5 31.3 7.1 -19.1 -17.7 -42.1 -33.0 11.0 -14.0 22.4 7.4 5.4 1.9 0.8

2.3 2.6 2.7 11.8 2.9 1.3 6.2 13.7 12.1 25.3 11.8 20.3 20.0 30.4 9.0 -9.7 4.4 -19.2 -27.0 -5.2 -12.6 24.7 7.4 5.5 -5.6 -0.4

3.3 3.4 2.4 9.7 2.2 1.4 14.3 17.5 12.5 26.0 13.6 20.9 51.4 19.2 9.7 6.9 29.7 -24.3 -25.4 21.6 10.4 29.9 8.0 6.6 -4.7 1.3

2.5 2.4 1.2 5.9 0.9 0.7 13.7 17.3 12.4 26.5 14.5 24.2 43.0 14.5 9.6 4.7 10.8 -29.6 -2.7 18.0 9.6 31.3 10.1 8.2 -4.1 -0.4

3.8 3.3 1.6 2.6 1.7 1.4 17.4 20.3 12.5 28.5 13.2 22.0 69.9 19.4 10.3 10.1 13.4 -28.8 10.7 28.8 9.7 27.8 10.9 6.3 -3.7 -1.0

3.9 3.6 2.6 7.3 2.3 2.0 13.8 14.8 9.6 27.9 8.6 23.1 30.8 10.9 10.6 11.4 9.4 7.8 5.9 22.7 10.9 27.8 9.8 7.6 -3.0 -0.9

3.7 3.7 2.8 10.6 2.0 2.1 12.4 11.9 8.5 17.8 11.0 21.4 15.9 13.4 10.2 13.8 10.4 42.3 10.2 14.7 10.9 26.7 9.2 7.2 -1.8 -1.8

Billions of Dollars Real GDP Nominal GDP

11522.1 11360.5 11299.0 11316.9 11347.0 11387.1 11463.4 11528.0 11622.9 11694.6 11803.1 11916.5 12026.4 14200.3 14097.2 14029.1 14084.1 14153.8 14241.5 14382.6 14514.4 14684.1 14841.8 15031.8 15230.1 15419.3

Prices & Wages, Percent Change, Annual Rate GDP Deflator 0.5 Consumer Prices -8.3 Producer Prices, Finished Goods -19.0 Employment Cost Index - Total Comp. 1.9

2.8 -2.4 -6.2 0.7

0.0 1.2 0.2 0.8

0.9 1.9 -0.9 1.0

0.9 1.7 -1.1 1.6

1.1 1.4 0.5 2.4

1.3 2.0 1.4 1.8

1.4 2.1 2.1 1.7

1.4 2.5 2.2 1.3

1.8 2.9 4.4 1.8

1.4 2.3 2.7 1.3

1.4 2.3 2.4 1.5

1.3 2.2 2.8 1.4

Other Key Measures Oil - WTI ($ per barrel) Productivity (%ch., saar) Total Industrial Production (%ch., saar) Factory Operating Rate Nonfarm Inven. Chg. (Bil. 2000 $) Consumer Sentiment Index Light Vehicle Sales (Mil. units, saar) Housing Starts (Mil. units, saar) Exist. House Sales (Total, Mil. saar) Unemployment Rate (%) Payroll Employment (%ch., saar) Federal Surplus (Unified, nsa, bil. $) Current Account Balance (Bil. $)

59.14 -0.6 -13.0 70.9 -31.1 57.7 10.31 0.658 4.740 6.9 -3.7 -332.5 -619.5

43.19 1.6 -19.0 66.7 -94.7 58.3 9.49 0.528 4.583 8.1 -5.9 -448.9 -406.0

59.59 3.7 -11.2 65.1 -141.0 68.2 9.56 0.506 4.717 9.3 -4.4 -333.8 -418.1

59.00 3.9 4.5 66.1 -72.6 67.1 10.01 0.570 4.618 9.8 -2.2 -474.8 -504.9

60.00 2.0 2.6 66.6 -19.0 67.8 10.25 0.619 4.646 10.1 -1.3 -393.9 -583.1

62.33 1.6 1.6 67.1 4.1 69.8 10.46 0.718 4.524 10.2 -0.1 -449.6 -631.7

63.67 2.4 2.1 67.6 20.7 73.0 10.81 0.807 4.465 10.3 0.9 -110.5 -632.8

63.67 1.2 2.5 67.9 12.1 73.4 11.72 0.913 4.489 10.2 0.7 -279.0 -641.4

67.33 1.6 3.2 68.6 11.7 73.2 12.40 1.024 4.589 10.1 1.3 -317.8 -650.7

70.67 0.7 4.1 69.3 14.6 72.1 12.91 1.137 4.772 10.0 1.5 -355.1 -670.2

72.00 1.7 5.2 70.3 28.7 72.9 13.42 1.247 4.892 9.8 2.0 -32.3 -672.3

74.00 1.5 5.7 71.2 39.3 73.2 14.02 1.356 5.095 9.6 2.2 -208.7 -690.0

76.25 1.2 5.8 71.9 42.5 74.0 14.63 1.437 5.354 9.4 2.3 -257.2 -708.6

Financial Markets, NSA Federal Funds Rate (%) 3-Month Treasury Bill Rate (%) 10-Year Treasury Note Yield (%) 30-Year Fixed Mortgage Rate (%) S&P 500 Stock Index (Four-Quarter % change) Exchange Rate, Major Trading Partners (% change, annual rate)

0.51 0.33 3.25 5.87 910 -39.1 0.800 49.5

0.18 0.21 2.74 5.06 809 -40.1 0.814 6.9

0.18 0.17 3.32 5.03 892 -35.0 0.783 -14.1

0.13 0.21 3.57 5.24 875 -30.1 0.759 -12.0

0.13 0.33 3.65 5.25 915 0.6 0.770 6.2

0.13 0.41 3.68 5.24 943 16.5 0.768 -0.9

0.13 0.47 3.71 5.24 974 9.2 0.760 -4.5

0.18 0.66 3.73 5.27 1004 14.8 0.752 -3.9

0.55 1.00 3.76 5.29 1035 13.1 0.744 -4.5

0.96 1.44 3.79 5.35 1065 13.0 0.738 -2.9

1.43 1.89 3.84 5.42 1095 12.5 0.731 -3.5

1.93 2.39 3.90 5.49 1126 12.1 0.723 -4.6

2.47 2.86 4.10 5.72 1157 11.8 0.720 -1.5

Incomes Personal Income (% ch., saar) Real Disposable Income (%ch., saar) Saving Rate (%) After-Tax Profits (Billions of $) (Four-quarter % change)

-1.7 2.9 3.2 931 -36.3

-2.3 6.0 4.3 1054 -21.8

3.9 6.5 6.0 1049 -21.9

-2.6 -3.5 4.7 1139 -12.4

1.5 0.7 4.6 1155 24.0

2.8 -2.0 3.8 1194 13.2

3.3 1.7 3.8 1227 17.0

3.6 2.0 3.6 1245 9.3

3.7 0.8 3.2 1306 13.1

4.0 -2.3 2.4 1400 17.3

4.1 2.2 2.5 1435 16.9

4.9 3.0 2.6 1463 17.5

4.8 2.9 2.6 1487 13.9

July 2009

U.S. ECONOMIC SERVICE

Executive Summary

11

TABLE 3

Summary of the U.S. Economy 2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Composition of Real GDP, Percent Change Gross Domestic Product 1.6 Final Sales of Domestic Product 1.2 Total Consumption 2.7 Durables 7.1 Nondurables 2.5 Services 1.9 Nonresidential Fixed Investment -9.2 Equipment & Software -6.2 Information Processing Equipment -4.7 Computers & Peripherals 5.0 Communications Equipment -21.1 Industrial Equipment -7.7 Transportation equipment -11.8 Aircraft -28.6 Other Equipment -3.1 Structures -17.1 Commercial & Health Care -15.7 Manufacturing -41.6 Power & Communication -2.4 Mining & Petroleum -23.3 Other -16.0 Residential Fixed Investment 4.8 Exports -2.3 Imports 3.4 Federal Government 7.0 State & Local Government 3.1

2.5 2.5 2.8 5.8 3.2 1.9 1.0 2.8 5.8 13.1 1.0 2.9 -9.7 -25.4 6.0 -4.1 -6.6 -7.3 -12.9 18.1 -4.5 8.4 1.3 4.1 6.8 0.2

3.6 3.3 3.6 6.3 3.5 3.2 5.8 7.4 9.3 11.4 9.5 -3.1 14.8 -3.1 6.1 1.3 2.4 4.9 -17.8 14.8 2.2 10.0 9.7 11.3 4.2 -0.2

2.9 3.1 3.0 4.6 3.4 2.6 7.2 9.3 8.1 16.1 2.6 8.4 14.5 -7.2 8.7 1.3 -0.8 17.3 -3.1 9.7 -4.9 6.3 7.0 5.9 1.2 -0.1

2.8 2.8 3.0 4.5 3.7 2.5 7.5 7.2 9.1 24.6 11.7 5.7 6.7 -15.7 4.1 8.2 6.1 10.2 8.1 11.6 7.7 -7.1 9.1 6.0 2.3 1.3

2.0 2.4 2.8 4.8 2.5 2.6 4.9 1.7 9.6 17.9 6.9 1.4 -12.6 23.1 -5.2 12.7 8.3 14.1 23.1 9.3 19.3 -17.9 8.4 2.2 1.6 2.3

1.1 1.4 0.2 -4.3 -0.6 1.5 1.6 -3.0 4.7 6.5 3.4 -4.2 -28.6 -12.3 -1.4 11.2 -0.3 39.4 14.7 17.1 13.0 -20.8 6.2 -3.5 6.0 1.1

-2.8 -2.3 -0.6 -5.1 -2.6 1.1 -18.3 -18.5 -10.9 -12.6 -16.6 -26.4 -39.1 -27.7 -20.4 -17.9 -20.7 22.4 3.9 -45.1 -13.0 -22.8 -14.3 -15.2 4.5 -1.0

1.5 0.7 1.6 2.4 2.3 1.2 -0.1 7.5 6.6 10.0 8.3 -1.0 44.2 25.6 -0.6 -14.2 -13.0 -31.2 -17.8 6.5 -16.0 9.2 3.7 8.5 1.3 0.0

3.1 3.0 2.0 6.9 1.9 1.3 12.6 16.4 11.8 26.5 12.9 21.8 40.0 18.5 9.7 3.8 11.5 -21.1 -9.3 17.4 5.3 28.3 9.3 6.9 -3.7 -0.3

3.8 3.6 2.4 6.4 1.8 2.1 13.8 13.7 8.7 18.8 10.7 18.2 31.6 16.5 9.3 14.0 17.6 31.3 4.8 12.1 8.9 17.9 9.9 7.1 -1.8 0.3

2.9 3.1 1.9 3.9 1.3 1.8 9.2 8.2 7.5 18.3 9.4 3.2 16.4 10.8 7.0 11.6 18.9 24.5 3.1 1.5 6.5 6.5 9.6 4.7 -0.7 1.7

2.6 2.7 2.2 3.8 1.6 2.2 5.1 4.8 6.9 18.2 8.2 0.6 2.0 5.5 6.1 6.0 7.3 6.3 6.7 4.8 3.6 1.4 8.6 4.0 0.0 1.2

Billions of Dollars Real GDP Nominal GDP Prices & Wages, Percent Change GDP Deflator Consumer Prices Producer Prices, Finished Goods Employment Cost Index - Total Comp. Other Key Measures Oil - WTI ($ per barrel) Productivity (%ch.) Total Industrial Production (%ch.) Factory Operating Rate Nonfarm Inven. Chg. (Bil. 2000 $) Consumer Sentiment Index Light Vehicle Sales (Mil. units) Housing Starts (Mil. units) Exist. House Sales (Total, Mil. units) Unemployment Rate (%) Payroll Employment (%ch.) Federal Surplus (Unified, FY, bil. $) Current Account Balance (Bil. $) Financial Markets, NSA Federal Funds Rate (%) 3-Month Treasury Bill Rate (%) 10-Year Treasury Note Yield (%) 30-Year Fixed Mortgage Rate (%) S&P 500 Stock Index (Percent change) Exchange Rate, Major Trading Partners (Percent change) Incomes Personal Income (% ch.) Real Disposable Income (%ch.) Saving Rate (%) After-Tax Profits (Billions of $) (Percent change)

10048.9 10301.1 10675.7 10989.5 11294.9 11523.9 11652.0 11330.8 11500.3 11860.2 12305.4 12666.2 13000.2 10469.6 10960.8 11685.9 12421.9 13178.4 13807.6 14264.6 14091.1 14455.6 15130.7 15934.4 16678.2 17420.7 1.7 1.6 -1.3 3.5

2.1 2.3 3.2 3.8

2.9 2.7 3.6 3.8

3.3 3.4 4.9 3.1

3.2 3.2 2.9 2.9

2.7 2.9 3.9 3.1

2.2 3.8 6.4 2.8

1.5 -0.6 -3.9 1.4

1.1 1.8 0.5 1.7

1.5 2.4 2.8 1.5

1.5 2.2 2.2 1.9

1.7 2.2 2.3 2.6

1.8 2.1 2.1 2.8

26.11 4.1 -0.1 72.7 15.2 89.6 16.82 1.710 5.8 -1.1 -160.3 -459.1

31.12 3.7 1.3 73.7 14.0 87.6 16.64 1.854 6.176 6.0 -0.3 -375.2 -521.5

41.47 2.8 2.5 76.2 48.2 95.2 16.87 1.950 6.727 5.5 1.1 -411.1 -631.1

56.56 1.7 3.3 78.6 39.1 88.6 16.95 2.073 7.076 5.1 1.7 -321.0 -748.7

66.12 0.9 2.3 79.4 46.3 87.3 16.50 1.812 6.516 4.6 1.8 -248.2 -803.5

72.18 1.4 1.5 79.0 -3.7 85.6 16.09 1.342 5.674 4.6 1.1 -161.5 -726.6

99.76 55.44 64.25 2.8 2.1 2.2 -2.2 -10.3 1.6 75.1 66.1 67.8 -34.3 -81.8 12.1 63.8 65.3 72.4 13.13 9.83 11.35 0.900 0.556 0.865 4.893 4.641 4.517 5.8 9.3 10.2 -0.4 -3.6 -0.5 -454.8 -1590.0 -1232.9 -706.1 -478.0 -639.1

73.23 1.3 4.1 70.7 31.3 73.1 13.74 1.294 5.028 9.7 1.6 -913.9 -685.3

79.42 1.3 5.2 73.5 55.1 76.4 15.55 1.563 5.893 8.8 2.4 -756.0 -742.5

86.17 1.1 3.7 74.1 37.9 78.2 16.55 1.659 6.400 8.1 2.0 -589.4 -733.3

90.47 1.6 2.9 74.2 27.7 77.4 17.02 1.665 6.381 7.7 1.4 -606.1 -718.2

1.67 1.61 4.61 6.54 996 -16.5 1.044 -1.5

1.13 1.01 4.02 5.82 964 -3.2 0.916 -12.3

1.35 1.36 4.27 5.84 1131 17.3 0.840 -8.2

3.21 3.13 4.29 5.86 1207 6.8 0.824 -1.9

4.96 4.72 4.79 6.42 1311 8.6 0.812 -1.5

5.02 4.38 4.63 6.33 1477 12.7 0.767 -5.6

1.93 1.40 3.67 6.04 1221 -17.3 0.733 -4.4

0.16 0.23 3.32 5.15 873 -28.5 0.782 6.7

0.24 0.63 3.72 5.26 989 13.3 0.756 -3.3

1.70 2.15 3.91 5.49 1111 12.3 0.728 -3.7

3.34 3.35 4.50 6.12 1232 10.9 0.717 -1.5

3.55 3.66 4.81 6.43 1329 7.9 0.712 -0.6

4.6 4.57 5.49 7.11 1415 6.5 0.713 0.1

1.8 3.1 2.4 576 14.3

3.2 2.2 2.1 665 15.4

6.2 3.6 2.1 897 35.0

5.6 1.4 0.4 1207 34.5

7.1 3.5 0.7 1405 16.4

6.1 2.8 0.6 1436 2.2

3.8 1.3 1.8 1231 -14.3

0.1 2.3 4.9 1099 -10.7

2.2 0.2 3.6 1243 13.1

4.0 0.9 2.5 1446 16.4

5.3 2.5 2.6 1492 3.1

5.3 2.0 2.6 1502 0.7

5.3 3.4 3.7 1468 -2.2

IHS Global Insight

12

U.S. ECONOMIC SERVICE

Executive Summary

TABLE 4

Alternative Scenarios of the U.S. Economy 2009:1

2009:2

2009:3

2009:4

2010:1

2010:2

2008

2009

2010

2011

2012

2013

2014

Composition of Real GDP, Percent Change, Annual Rate Gross Domestic Product -5.5 -2.7 Total Consumption 1.4 -0.5 Nonresidential Fixed Investment -37.3 -14.9 Residential Fixed Investment -38.8 -23.7 Exports -30.6 -12.6 Imports -36.4 -18.1 Federal Government -4.4 8.4 State & Local Government -2.2 -1.7

-1.9 -0.4 -12.3 -9.3 -5.6 19.7 5.5 -1.7

-2.0 -1.1 -8.1 -7.3 -5.2 9.2 2.3 -1.2

-1.6 0.2 -1.2 -6.8 -4.8 5.1 1.3 -0.5

0.0 0.6 -8.3 6.3 2.0 -3.3 1.9 -1.0

1.1 0.2 1.6 -20.8 6.2 -3.5 6.0 1.1

-3.3 -1.1 -19.3 -23.7 -15.4 -15.5 4.5 -1.2

-0.9 0.1 -5.7 -2.4 -1.8 3.3 1.3 -1.2

2.3 0.5 9.7 21.4 10.5 3.2 -3.7 -1.6

2.9 0.9 15.3 15.7 8.7 3.9 -1.8 -0.2

2.5 1.3 9.3 10.1 6.7 3.4 -0.7 1.5

2.4 1.9 5.4 6.6 6.6 3.9 0.0 1.2

3.8 6.4 2.8

-1.0 -4.6 1.3

1.3 -0.7 1.3

3.6 5.1 1.4

3.5 4.7 2.1

2.9 3.4 2.7

2.7 3.0 2.7

99.76 49.98 54.58 79.31 2.8 1.7 1.0 1.4 -2.2 -11.3 -2.8 3.2 -34.3 -82.4 -51.5 10.9 63.8 64.9 65.3 63.2 13.13 8.84 8.71 11.35 0.900 0.546 0.701 1.044 5.8 9.4 11.2 11.1 -0.4 -3.8 -1.8 0.6 -454.8 -1597.1 -1300.2 -1029.6

93.49 0.8 4.6 37.6 64.4 12.88 1.296 10.3 2.0 -948.3

99.62 0.7 2.9 26.5 67.6 14.30 1.472 9.7 1.9 -862.6

104.04 1.2 2.3 23.6 68.5 15.12 1.566 9.3 1.5 -909.4

False Dawn (Prob. = 20%)

Prices & Wages, Percent Change, Annual Rate Consumer Prices -2.4 Producer Prices, Finished Goods -6.2 Employment Cost Index - Total Comp. 0.7

1.1 0.1 0.7

-0.8 -6.3 1.0

1.7 -1.7 1.2

0.5 -1.8 1.9

2.2 1.5 1.1

Other Key Measures Oil - WTI ($ per barrel) 43.19 Productivity (%ch., saar) 1.6 Total Manufacturing Production (%ch., saar) -19.0 Nonfarm Inven. Chg. (Bil.2000 $) -94.7 Consumer Sentiment Index 58.3 Light Vehicle Sales (Mil. units, saar) 9.49 Housing Starts (Mil. units, saar) 0.528 Unemployment Rate (%) 8.1 Payroll Employment (%ch., saar) -5.9 Federal Surplus (Unified, FY, bil. $) -448.9

59.59 3.1 -13.0 -143.6 68.2 9.56 0.516 9.3 -4.4 -334.7

47.07 1.8 0.9 -67.3 68.7 8.73 0.571 9.9 -3.0 -481.0

50.08 0.2 -2.2 -23.9 64.5 7.57 0.571 10.4 -2.6 -403.2

49.41 0.2 -4.6 -34.5 65.5 7.67 0.604 10.8 -1.7 -464.0

52.75 1.5 -3.0 -49.5 66.1 8.17 0.663 11.2 -0.8 -129.9

0.18 2.74

0.18 3.32

0.13 3.34

0.12 3.32

0.12 3.32

0.12 3.40

1.93 3.67

0.16 3.18

0.12 3.33

2.18 4.38

4.69 6.03

5.31 6.59

5.87 6.62

-2.3 -21.8

3.8 -22.7

-3.8 -18.4

-0.2 14.3

0.5 0.9

0.7 4.1

3.8 -14.3

-0.2 -14.3

0.2 4.9

3.0 20.3

5.5 1.3

5.9 1.5

5.8 1.1

Composition of Real GDP, Percent Change, Annual Rate Gross Domestic Product -5.5 -0.6 Total Consumption 1.4 0.0 Nonresidential Fixed Investment -37.3 -9.7 Residential Fixed Investment -38.8 -21.6 Exports -30.6 -10.4 Imports -36.4 -15.9 Federal Government -4.4 8.4 State & Local Government -2.2 -1.7

3.1 4.1 -0.3 1.2 7.7 22.5 5.5 -0.6

3.5 2.9 2.9 18.0 12.8 24.7 2.3 0.5

3.1 2.5 12.4 23.7 10.6 21.3 1.3 1.2

3.9 2.8 7.0 33.6 9.8 9.8 1.9 1.9

1.1 0.2 1.6 -20.8 6.2 -3.5 6.0 1.1

-2.0 -0.2 -16.6 -21.1 -12.6 -14.1 4.5 -1.0

3.1 2.8 6.5 19.9 8.2 14.5 1.3 0.8

3.4 2.6 15.1 30.7 7.7 8.4 -3.7 0.3

3.8 2.8 14.3 16.7 7.9 7.8 -1.7 0.5

3.2 2.3 9.9 6.6 8.9 5.6 -0.7 1.7

3.1 2.6 7.5 2.5 8.7 5.2 0.0 1.2

3.8 6.4 2.8

-0.2 -2.9 1.4

2.5 2.0 2.3

2.1 1.9 2.2

1.6 1.1 2.1

1.4 1.0 2.3

1.4 1.3 2.6

99.76 62.03 74.48 2.8 2.6 2.4 -2.2 -8.9 5.1 -34.3 -61.7 52.8 63.8 70.3 88.8 13.13 10.62 13.24 0.900 0.597 1.096 5.8 9.1 9.1 -0.4 -3.2 1.2 -454.8 -1573.4 -1154.9

72.79 1.2 4.0 43.9 85.2 15.39 1.542 8.4 2.0 -793.7

73.11 1.5 5.1 58.3 86.4 16.99 1.785 7.5 2.2 -605.5

76.00 1.7 4.9 47.1 87.5 18.19 1.882 7.0 1.7 -424.6

79.47 2.2 4.5 42.0 84.8 18.53 1.886 6.7 1.2 -419.5

Financial Markets, NSA Federal Funds Rate (%) 10-Year Treasury Note Yield (%) Incomes Personal Income (% ch., saar) After-Tax Profits (Four-qtr.% change) Green Shoots Sprout (Prob. = 20%)

Prices & Wages, Percent Change, Annual Rate Consumer Prices -2.4 Producer Prices, Finished Goods -6.2 Employment Cost Index - Total Comp. 0.7

1.2 0.5 0.8

4.9 6.0 1.2

2.6 1.4 2.2

1.7 1.1 3.1

2.7 2.1 2.5

Other Key Measures Oil - WTI ($ per barrel) 43.19 Productivity (%ch., saar) 1.6 Total Manufacturing Production (%ch., saar) -19.0 Nonfarm Inven. Chg. (Bil. 2000 $) -94.7 Consumer Sentiment Index 58.3 Light Vehicle Sales (Mil. units, saar) 9.49 Housing Starts (Mil. units, saar) 0.528 Unemployment Rate (%) 8.1 Payroll Employment (%ch., saar) -5.9 Federal Surplus (Unified, FY, bil. $) -448.9

59.59 5.7 -10.1 -110.3 68.2 9.57 0.519 9.3 -4.4 -330.9

71.95 4.7 14.2 -56.2 73.0 11.35 0.614 9.5 -0.1 -461.2

73.41 2.6 7.2 14.4 81.9 12.09 0.727 9.4 1.1 -377.4

73.88 1.3 5.0 48.5 89.1 12.53 0.901 9.3 2.0 -431.6

76.05 2.2 4.0 58.8 89.5 13.01 1.047 9.2 2.5 -90.5

0.18 2.74

0.18 3.32

0.13 3.68

0.20 3.89

0.25 3.99

0.40 4.11

1.93 3.67

0.17 3.40

0.56 4.10

1.29 3.59

3.04 4.13

3.25 4.30

4.09 4.82

-2.3 -21.8

4.1 -19.2

-0.9 -3.5

4.1 34.8

5.5 19.7

5.5 18.0

3.8 -14.3

0.5 -5.6

4.3 11.8

5.0 14.9

5.2 1.4

4.8 0.0

4.8 -2.7

Financial Markets, NSA Federal Funds Rate (%) 10-Year Treasury Note Yield (%) Incomes Personal Income (% ch., saar) After-Tax Profits (Four-qtr.% change)

July 2009