Gs_is The Worst Over

US Economics Analyst Issue No: 09/05 February 6, 2009 FOR THOSE PERMISSIONED: Goldman Sachs Global ECS Research at https://360.gs.com

What Does It Take to Think the Worst Is Over?

Jan Hatzius [email protected] 212 902 0394 Ed McKelvey [email protected] 212 902 3393 Alec Phillips [email protected] 202 637 3746 Andrew Tilton [email protected] 212 357 2619 Seamus Smyth [email protected] 212 357 6224 Kent Michels [email protected] 212 902 6726

Many market participants are focused on the question of when the economy will stop deteriorating as rapidly as it is now— that is, when will the second derivative turn positive? We expect that to occur over the next few months as fiscal stimulus and the slow healing of credit markets help break the economy’s slide. For several major economic indicators, we construct metrics of the probability that the worst pace of decline in that indicator has passed. Our exercise provides a scorecard to against which to measure future improvements in the data. As an example of what this analysis produces, consider the manufacturing index from the Institute for Supply Management (ISM). Our analysis finds that an increase of 2.7 points from the cycle low, as we saw in January, implies a 47% chance we have seen the bottom.

Probability that Worst is Over Increases as ISM Improves From Cycle Low Percent Chance that Trough Is Past 100

75

50 ISM Manufacturing Index 25

0 0

3 6 9 12 Change from lowest reading this cycle (points) Source: Our calculations.

15

The Labor Market Breaks Down

The past week provided several tentative hints that the pace of decline may be at its worst: both of the ISM surveys rebounded slightly in January and retail same-store sales were not quite as bad as expected. But the labor market news was terrible, with a decline of nearly 600,000 payroll jobs and leading indicators suggesting that our 9% forecast for end-of-year unemployment is all too realistic.

Thousands

Next week is shaping up to be an extremely important one for US economic policy. Market participants are focused on the administration’s rescue plan for the financial sector, with an announcement scheduled Monday. On the fiscal side, we are cautiously optimistic that the Congress will pass a stimulus bill in the vicinity of $800-900 billion. And don’t rule out the possibility of monetary policy news, with Chairman Bernanke testifying before Congress on Fed programs.

200

Percent change, 3-mo annualized

700

10 Initial Jobless Claims (left)

8

Hours Worked (right)

600

6 4

500

2 400

0 -2

300

-4 -6 -8

100

-10 97

98

99

00

01

02

03

04

05

06

07

08

09

Source: Department of Labor.

Important disclosures appear at the back of this document.

GS Global ECS US Research

US Economics Analyst

I. Can Policy Make the Save? 1. Jobless claims continue to push higher. The Labor Department reported 626,000 new claimants last week, easily the high for this cycle and the highest weekly total since 1982. This foots with a slew of recent layoff announcements (about 500,000 over the past two months, according to the outplacement firm Challenger, Gray, and Christmas).

The US economy continues to take a beating in early 2009, judging from the information released over the past week. We forecast -4.5% real GDP growth (annualized) in the first quarter after -3.8% in the fourth quarter; the latter figure appears likely to be revised down at least a little given that December reports on construction outlays and factory orders were weaker than government statisticians assumed.

2. Hiring has plummeted. Job advertising provides a useful gauge of hiring intentions. January surveys of online job postings from the Conference Board and Monster.com show declines of 25%-30% year-overyear, much steeper than a few months ago.

Though the beating is severe, there are hints that it may no longer be intensifying (see this week’s center section for a quantitative analysis on this issue). Both the manufacturing and nonmanufacturing surveys from the Institute for Supply Management rebounded slightly from December lows (Exhibit 1). Same-store retail sales were dismal, but at -2.3% year-over-year slightly better than expectations. Auto sales were a bigger disappointment; they sank to a pathetic 9.6million annual rate in January. However, much of the incremental damage here was due to fleet sales rather than end consumer demand.

3. Leading sectors are contracting fastest. As we have noted in prior work, certain sectors—including housing construction, banking, and temporary employment—tend to be the first to decline and the first to recover in a labor market cycle. Collectively, the rate of decline in these sectors is still increasing, to nearly -15% annualized over the past three months. The labor market is the most obvious—but not the only—evidence that the gap between actual and potential output is opening quickly. Industrial capacity utilization has also fallen sharply, and this week’s vacancy data for the housing sector revealed that much lower levels of home construction have not yet begun to whittle away the massive excess supply there. The implication of high levels of excess capacity is continued easing in inflation pressure (Exhibit 3).

The labor market is a disaster, which should not be much of a surprise given that employment trends typically lag economic activity by one to three months. Payrolls dropped by nearly 600,000 in January, and the unemployment rate moved up to 7.6%. Hours worked are contracting at an 8.8% annual rate (Exhibit 2). With the economy continuing to shrink at a rapid clip early in 2009, job losses unfortunately have some way to go. Key leading indicators universally point towards pain ahead, and suggest that the risks are skewed to the high side of our 9% forecast for the end-of-year unemployment rate:

Hoping for Policy Help Next week is shaping up to be an extremely important one for US economic policy. Market participants are

Exhibit 1: ISM Surveys Suggest Stabilization—At Least in the Rate of Decline Index

Exhibit 2: The Labor Market Breaks Down

Index

70

Thousands

Percent change, 3-mo annualized 10

700

70

Initial Jobless Claims (left)

ISM Manufacturing ISM Nonmanufacturing 60

8

Hours Worked (right)

600

6

60

4

500

2 50

0

400

50

-2 300 40

-4

40

-6

200

-8 30 98

99

00

01

02

03

04

05

06

07

08

97

09

98

99

00

01

02

03

04

05

06

07

08

09

Source: Department of Labor.

Source: Institute for Supply Management.

Issue No: 09/05

-10

100

30 97

2

February 6, 2009

GS Global ECS US Research

US Economics Analyst

2. Pricing. How will troubled assets be priced and marked? From the banks’ perspective, the most generous program would involve guarantees or purchases at current book value; the most punitive, at market prices. A more likely outcome would involve the government (or its representatives) estimating a hold-to-maturity value for the assets and either guaranteeing or purchasing them at that price. Policymakers may hesitate to force markdowns, as they would create an immediate need for additional capital injections.

Exhibit 3: Inflation Pressures to Fade Further Percent change, year ago

Percent change, year ago 3.0

3.0 Core PCE Price Index 2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5 0.0

0.0 98 99 00 01 02 03 04 05 Note: Dotted line denotes GS forecast. Source: Department of Commerce.

3. Capital. Will additional government capital be provided to the banks, and on what terms? Media reports have suggested that government preferred shares might be converted to common equity. This could give banks facing insolvency a new lease on life, though an important issue is whether any such conversion would occur immediately for all banks (which would be dilutive even for well-capitalized banks) or would occur after current common equity holders were wiped out (which would leave the bank in the hands of government). Even if the government does convert preferred shares to common equity, there is a risk that more capital will be required for the most troubled institutions.

06

07

08

09

10

focused on the administration’s rescue plan for the financial sector, with an announcement scheduled Monday. On the fiscal side, we are cautiously optimistic that the Congress will pass a stimulus bill in the vicinity of $800-900 billion. And don’t rule out the possibility of monetary policy news, with Chairman Bernanke testifying on Fed programs Tuesday.

In conjunction with the financial sector plan, policymakers may choose to roll out related economic policy measures—in particular, subsidies for residential loan modifications and/or a “buy-down” to lower conforming mortgage rates to 4%. When all is said and done, it should certainly be a major announcement.

In our view, the most critical item on the agenda next week is the financial sector rescue plan. As we parse Monday’s announcement from the Treasury, we will be focused on three basic parameters: 1. Size. How big is the pool of assets that will be guaranteed or purchased? Rough numbers suggest at least $2 trillion in residential mortgage whole loans and probably an equivalent amount of non-residential loans could be defined as “troubled” or hard-to-value assets. So on the surface, this would suggest a program in the $4 trillion-plus range would be needed to have confidence that a meaningful part of banks’ potential losses have been capped. But the government will not (hopefully) pay face value for these assets, and might be able to narrow the scope of the program to recent vintages, using credit-scoring techniques to identify the worst loans within each group. This could potentially bring down the value of whole loans purchased or guaranteed into the $1-$2 trillion range. Any plan that addresses securities as well would have to be correspondingly bigger. Media reports suggest that guarantees are likely to feature prominently in the rescue plan—these are probably more attractive to policymakers than a large “bad bank,” as they do not require upfront government borrowing, and use banks’ net interest earnings in coming quarters as a shield against taxpayer losses.

Issue No: 09/05

Meanwhile, the not-so-pretty legislative process continues with Senate deliberations over the fiscal stimulus package. The bill under discussion totals $940 billion (which includes a $70 billion cost to index the Alternative Minimum Tax to inflation for another year). If all goes well, the House and Senate will conference later in the week to reconcile their respective bills and pass a measure shortly thereafter. We think passage is likely, but it is certainly not a done deal at this point—at present, a group of Senate Democrats and Republicans is working on a proposal to cut as much as $100 billion in out-year spending from the bill, and this would represent a significant difference with the House version. That said, these changes would have very little impact on 2009 outlays, and since the original Senate bill was more front-loaded to begin with, the final compromise may still include more stimulus for 2009 than the $250 billion or so in the House package.

Andrew Tilton

3

February 6, 2009

GS Global ECS US Research

US Economics Analyst

II. What Does It Take to Think that the Worst Is Over? seen the trough for this cycle? (Recall that the ISM index measures the fraction of businesses seeing an increase in manufacturing activity over the month; thus, a reading that is better but still under 50 indicates that manufacturing is still deteriorating, but at a slower rate.) In other words, are the worst declines in manufacturing over?

Many market participants are focused on the question of when the economy will stop getting bad as rapidly as it is now—that is, when will the second derivative turn positive? We expect that to occur over the next few months as fiscal stimulus and the slow healing of credit markets help break the economy’s slide, though we do not expect growth until the second half of the year.

The problem can be illustrated by considering the behavior of the ISM manufacturing index during the 1981-1982 recession, as shown in Exhibit 1. In November 1981 the index dipped to 36.1. By February 1982, however, it had increased to 38.3, an improvement of 2.2 points. But manufacturing deteriorated again, reaching its eventual cyclical low of 35.5 in May 1982. So the 2.2-point improvement from November 1981 to February 1982 proved to be a false signal as the ultimate fastest pace of decline had not yet been reached. We repeat this procedure across all months in recessions dating back to 1970 to get a distribution that we then use statistical techniques to smooth. This procedure gives us an estimated probability that a still faster pace of decline is yet to come for any given improvement relative to the worst reading to date.1

We construct quantitative metrics for a variety of indicators of the probability that the worst pace of decline is over for that indicator to help answer this question. Our exercise provides a scorecard against which to measure future improvements. As an example of what this analysis produces, consider the manufacturing index from the Institute for Supply Management (ISM). Our analysis finds that an increase of 2.7 points from the cycle low, as we saw in January, implies a 47% chance we have seen the bottom. Though there are some tentative signs of improvement, the probabilities for most indicators suggest a great deal of uncertainty about whether the worst is indeed over.

Current Contraction Likely Most Rapid Rate Economic activity contracted at a 3.8% annual pace in the fourth quarter and the first quarter looks likely to be even worse—our current forecast looks for a 4.5% annualized decline in GDP. But we think it likely that the current pace of contraction will turn out to be the deepest of this recession. Our forecast envisages moderation to a decline of only 1% in the second quarter, followed by anemic growth during the second half. In our view the boost from the fiscal stimulus, combined with the easing in financial conditions relative to the almost total seizure of credit markets in October, will be enough to slow the rapid decline— but not to restore normal growth.

Exhibit 1: Increase in ISM during 1982 Gave a False Signal That Trough Had Passed Index

100 ISM Manufacturing Index

46

80

Percent Chance that ISM Has Already Troughed

60

42

Evidence of the expected abatement in the downward trend of economic activity is still scant, though some tentative signs do exist. However, most monthly economic data series are noisy, so these signs could well reverse themselves. Given that, what sort of improvement would be needed to persuade a skeptic that the worst really is over?

40 38 20

34

0 Sep-81

Dec-81

Mar-82

Jun-82

Sep-82

Dec-82

Source: Institute of Supply Management.

Is the Turn in the ISM Real? To answer the question, we construct a quantitative measure of how likely it is that a faster pace of decline in an economic indicator is still to come, given whatever improvement may have been seen so far. For instance, is the improvement in the January ISM manufacturing index reported earlier in the week, to 35.6 from 32.9, large enough to signal that we have

Issue No: 09/05

Probability

1

4

Specifically we run a probit regression. The dependent variable is whether or not the worst pace of decline has already occurred while the explanatory variable is the difference between the current month’s reading and the worst reading to date. The results of that regression then allow us to calculate a probability that the worst decline is yet to come. February 6, 2009

GS Global ECS US Research

US Economics Analyst

deterioration, some of the series have to be transformed. The results, including notes on the transformations, are summarized in Exhibit 3.

Exhibit 2: Probability that Worst is Over Increases as ISM Improves From Cycle Low Percent Chance that Trough Is Past 100

Looking across the results, it is apparent that there is wide variation in how large a swing needs to occur before one can have confidence that the worst is over. In general terms, the results depend on two factors. First, how noisy is a series from month to month? Those that tend to be volatile month-to-month naturally require a bigger move to confirm that the lows have passed. Second, how persistent is a change in direction? Some series are more likely to follow up moves in one direction with more moves in the same direction. For those series, any turn is more meaningful.

75

50 ISM Manufacturing Index 25

0 0

3 6 9 12 Change from lowest reading this cycle (points) Source: Our calculations.

The Current State of Data Has Hints—But Only Hints—That the Worst Could Be Over

15

On the basis of the current data there is some—very limited—cause for optimism. Several series have rebounded from their worst pace of decline, though a number still show the fastest pace of deterioration for the cycle in the most recent month, as shown in Exhibit 4. Generally, the labor market indicators still look fairly poor, while the consumer ones have seen some letup in the pace of decline. As noted above, manufacturing occupies the middle ground.

Exhibit 2 summarizes the results for the ISM. When the current month is the worst decline seen so far, the chance that the worst is over for that recession is only about 20%. Improvements off that recent bottom reduce the chance that a worse reading happens in the future. For example, a 3.1-point improvement increases the chance that the worst is over for manufacturing to about 50%. To get to 75% requires an increase from the recent low reading of 5.6 points, and to 90% an increase of 8.1 points.

Exhibit 3: How Much Improvement Needed?

We can now answer the original question posed above: how confident does the current improvement in the ISM make us that a faster pace of decline is not lurking ahead. The answer: only a moderate amount. The probability that we have passed the trough improves from 23% to 47%. In essence, the ISM falls in the middle ground; whether or not a worse reading is yet to come is a tossup.

Improvement Needed for an X% Chance That Trough is Past: Indicator

Thresholds Differ Across Indicators

Initial Jobless Claims*

Monthly

Auto Sales

% Change

Confidence

None

3.0

5.7

7.7

0.18

0.40

0.56

19

30

39

0

26

45

1.9

6.6

10.1

*Lower reading is better. Source: Our calculations.

The same procedure can be applied to other indicators. For each, the procedure quantifies how likely it is that the worst is over for that indicator, given the current reading relative to the worst so far in the recession. We focus on five indicators that cover three essential segments of the economy: the labor market, manufacturing and the consumer. In choosing the indicators, we focus on those that are generally not revised, or where revisions are relatively small. Since many economic data series can be revised substantially, looking at some series as they are reported now could give misleading comparisons about whether a reading was the worst yet of that recession. Hence, we exclude some high profile indicators such as the change in payroll employment, durable goods orders and the various housing-related metrics. As we are interested in the pace of Issue No: 09/05

Transformation 50% Chance 75% Chance 90% Chance

ISM Manufacturing None Index Unemployment* Difference

Exhibit 4: Signal Differs Across Indicators Trough So Current Far in 2008 Reading Recession

Reading Needed to Conclude: 50% 75 % 90 % chance chance chance worst worst worst over over over

ISM Manufacturing Index

32.9

35.6

35.9

38.6

40.6

Unemployment*

0.53

0.36

0.35

0.13

-0.03

Initial Jobless Claims*

572

572

553

542

533

Auto Sales

-16

-7

-16

10

29

Confidence

55.3

61.2

57.2

61.9

65.4

*Lower reading is better. Source: Our calculations.

5

February 6, 2009

GS Global ECS US Research

US Economics Analyst

1. Increase in Unemployment (49% probability worst is past) – Despite the large 0.36 percentage point increase in the unemployment rate reported today, the model assigns a one in two chance to the worst—defined as the largest increase—being over. Why? Because what we have seen so far was very bad; the unemployment rate surged 0.54 percentage points back in May 2008. That is the benchmark against which this increase is measured, and it is about 0.2 percentage points better. Additionally, the increase was somewhat smaller than the 0.42-point increase in December.

Exhibit 5: Tentative Signs That Worst Is Past Index

2. Monthly Initial Jobless Claims (14%) – Claims for January sit at their worst point of the cycle, an extremely high 572,000. Using our metric that means the chances are only about 35% that the worst is actually over. The data flow through the month is consistent with further deterioration. Claims for the last week of January were 626,000—well above the monthly average. To increase the probability to 50% that that January was the worst month of this cycle, we would need to see claims drop to an average of 553,000. However the further moderation to get to a 75% chance is relatively small, only an additional 11,000 to 542,000.

55

55

45

45

35

35 Aggregate Index Combining Probabilities that Troughs Have Passed 25

25 Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Source: Our Calculations.

There has been a notable improvement from October, when the pace of economic deterioration was extremely rapid, and clearly the fastest so far during the recession. The ISM manufacturing improvement accounts for about 5 points of the increase. However, substantial further improvement is still needed to have any sort of confidence that the worst is over. Across indicators the average sits at just under a 50% chance.

3. Percent Change in Auto Sales (58%) – Even with a disappointing January—auto sales growth slipped from +1% to -7% (month-to-month, not annualized)—this indicator remains in the middle ground. This is because the benchmark is so low: sales plummeted 16% in November, so the 7% decline in January is still 9 percentage points better. However, the relative improvement is still not enough to get to a 75% probability that the worst is over—that needs a monthly rebound of 10% (about one million units at the current sales pace). The required improvement is large because auto sales are volatile month-to-month.

Also, the index currently assigns a lower chance that the pace of fastest deterioration has passed than in the late summer of 2008. This shows the importance of combining this sort of quantitative index with economic judgment. At that time the economy was boosted by the first round of fiscal stimulus, and our forecast expected renewed deterioration in part due to the temporary nature of that stimulus. This index would not have been helpful then since the underlying economics pointed to more severe weakness ahead.

A Scorecard for our Forecast The fact that using this method would have led to total misreading of the situation last summer is why we view these thresholds as a scorecard for our forecast rather than an input into the forecast. A forecast tries to say what is to come, using the knowledge of the broader economic situation. In this regard, we are in a very different situation now than last summer since the underlying economic dynamics should be positive—at least in a relative sense—as the more sustained fiscal stimulus and a continued easing of credit conditions come into play. So we will be using this exercise as a metric to see if the data are confirming our forecast of the pace of decline slowing: to discern whether improvements over the next several months rise to the level of being meaningful, or if they are just noise.

4. Michigan Confidence (71%) – Confidence provides the most optimistic read, with over a 50% probability that the worst is over. The latest reading of 61.2 is nearly 6 points above the low of 55.3, a large enough improvement to make a new low appear somewhat unlikely. In fact, this is the only series that currently is near the 75% threshold, with a further improvement of just 0.7 points necessary to meet it.

A Combined Index Of course, the question that really matters is not whether some indicator has turned, but whether the economy as a whole has. As a first pass at an answer, we combine all five indicators into an index by taking the average of the probabilities, as shown in Exhibit 5.

Issue No: 09/05

Index

Seamus Smyth 6

February 6, 2009

GS Global ECS US Research

US Economics Analyst

THE US ECONOMIC AND FINANCIAL OUTLOOK (% change on previous period, annualized, except where noted)

2007

2008 (f)

2009 (f)

Q1

2008 Q2 Q3

2.0 2.8 -17.9 4.9 1.7

1.3 0.3 -20.8 1.8 -2.5

-1.8 -1.5 -15.2 -13.9 -14.2

0.9 2.5 0.9 -25.1 2.4 -1.1

2.8 2.1 1.2 -13.3 2.5 -4.1

2.9

3.8

-0.6

4.3 4.2

2.3 2.2 2.7

2.3 2.2 0.5

1.3 1.1 0.3

4.6

5.8

4.24 4.98

0.16 1.83

2009 Q2 Q3

Q4

Q1

Q4

-0.5 0.7 -3.8 -16.0 -1.7 -8.7

-3.8 -0.2 -3.5 -23.6 -19.1 -16.2

-4.5 -1.5 -2.5 -20.0 -20.0 -25.0

-1.0 -2.5 0.0 -10.0 -15.0 -12.5

1.0 -2.1 1.0 -5.0 -12.5 -5.0

1.0 -0.9 1.0 0.0 -10.0 -3.0

5.0 4.3

6.7 5.3

-9.2 1.5

-2.2 -0.1

2.1 -0.8

1.6 -2.0

0.9 0.6

2.4 2.2 0.0

2.3 2.3 0.1

2.5 2.3 1.4

2.0 1.8 0.7

1.6 1.5 0.4

1.5 1.2 1.0

1.0 0.8 0.1

1.1 0.9 -0.5

8.5

4.9

5.4

6.0

6.9

7.8

8.5

8.8

9.0

0.13 1.00

2.61 2.78

2.00 2.77

1.81 3.12

0.16 1.83

0.13 1.25

0.13 1.00

0.13 1.00

0.13 1.00

3.12 3.49 4.10 -0.6 -162

0.82 0.75 2.00 1.52 2.42 2.90 -6.2 -25.0 -455 -1,425

1.62 2.48 3.51 1.8

2.77 3.49 4.10 -6.4

2.08 2.88 3.69 -7.9

0.82 1.52 2.42 -12.0

0.75 1.60 2.50 -25.0

0.75 1.80 2.70 -30.0

0.75 1.90 2.80 -30.0

0.75 2.00 2.90 -14.0

_

_

_

_

_

_

_

_

-5.3

-4.6

-2.8

-5.0

-5.1

-4.8

-3.7

-3.1

-2.8

-2.8

-2.7

1.46 112

1.35 91

1.45 90

1.55 101

1.56 107

1.44 107

1.35 91

1.30 90

1.40 90

1.43 90

1.45 90

OUTPUT AND SPENDING Real GDP Year-to-year change Consumer Expenditure Residential Fixed Investment Business Fixed Investment Industrial Production, Mfg

INFLATION Consumer Price Index Year-to-year change Core Indexes (% chg, yr/yr) CPI PCE* Unit Labor Costs (% chg, yr/yr)

LABOR MARKET Unemployment Rate (%)

FINANCIAL SECTOR Federal Funds** (%) 3-Month LIBOR (%) Treasury Yield Curve** (%) 2-Year Note 5-Year Note 10-Year Note Profits*** (% chg, yr/yr) Federal Budget (FY, $ bn)

FOREIGN SECTOR Current Account (% of GDP) Exchange Rates Euro ($/€)** Yen (¥/$)**

* PCE = Personal consumption expenditures. ** Denotes end of period. *** Profits are after taxes as reported in the national income and product accounts (NIPA), adjusted to remove inventory profits and depreciation distortions. NOTE: Published figures are in bold

Copyright 2009 The Goldman Sachs Group, Inc. All rights reserved. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of The Goldman Sachs Group, Inc. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. The Goldman Sachs Group, Inc. does not provide tax advice to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment. Certain transactions - including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have “long” or “short” positions in, act as principal in, and buy or sell the securities or derivatives (including options) thereof of companies mentioned herein. For purposes of calculating whether The Goldman Sachs Group, Inc. beneficially owns or controls, including having the right to vote for directors, 1% of more of a class of the common equity security of the subject issuer of a research report, The Goldman Sachs Group, Inc. includes all derivatives that, by their terms, give a right to acquire the common equity security within 60 days through the conversion or exercise of a warrant, option, or other right but does not aggregate accounts managed by Goldman Sachs Asset Management. No part of this material may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without The Goldman Sachs Group, Inc.’s prior written consent. The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs JBWere Pty Ltd (ABN 21 006 797 897) on behalf of Goldman Sachs; in Canada by Goldman Sachs Canada Inc. regarding Canadian equities and by Goldman Sachs & Co. (all other research); in Germany by Goldman Sachs & Co. oHG; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd, in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs JBWere (NZ) Limited on behalf of Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union.This material has been issued by The Goldman Sachs Group, Inc. and/or one of its affiliates and has been approved for the purposes of section 21 of the Financial Services and Markets Act 2000 by Goldman Sachs International, which is regulated by the Financial Services Authority, in connection with its distribution in the United Kingdom, and by Goldman Sachs Canada, in connection with its distribution in Canada. Goldman Sachs International and its non-US affiliates may, to the extent permitted under applicable law, have acted on or used this research, to the extent that it relates to non-US issuers, prior to or immediately following its publication. Foreign-currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies, effectively assume currency risk. In addition, options involve risk and are not suitable for all investors. Please ensure that you have read and understood the current options disclosure document before entering into any options transactions. Further information on any of the securities mentioned in this material may be obtained on request, and for this purpose, persons in Italy should contact Goldman Sachs S.I.M. S.p.A. in Milan or its London branch office at 133 Fleet Street; persons in Hong Kong should contact Goldman Sachs (Asia) L.L.C. at 2 Queen’s Road Central; persons in Australia should contact Goldman Sachs JBWere Pty Ltd. (ABN 21 006 797 897), and persons in New Zealand should contact Goldman Sachs JBWere( NZ) Ltd . Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this material in conjunction with the last published reports on the companies mentioned herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risk warnings is available from the offices of Goldman Sachs International on request. A glossary of certain of the financial terms used in this material is also available on request. Derivatives research is not suitable for retail clients. Unless governing law permits otherwise, you must contact a Goldman Sachs entity in your home jurisdiction if you want to use our services in effecting a transaction in the securities mentioned in this material. Other disclosure information is available at http://www.gs.com/research/hedge.html or from Research Compliance, One New York Plaza, New York, NY 10004.

Issue No: 09/05

7

February 6, 2009

US Calendar Focus for the Week Ahead As noted on page 3, policy issues will take center stage this week. Treasury Secretary Timothy Geithner kicks off with a major announcement on financial rescue on Monday; Federal Reserve Chairman Ben Bernanke follows with testimony on the Fed’s liquidity and credit programs on Tuesday; and by the weekend Congress is scheduled to have completed work on a fiscal stimulus bill (February 9, 10, and 13). On the data front, the December trade balance should show further improvement as petroleum prices slid in December and volumes do not appear to have increased materially. Outside petroleum, declines in nonpetroleum imports and exports should roughly offset one another (February 11). Although auto sales fell further and chain stores reported dismal results, the implications for the retail sales report for January do not suggest a replay of the horrific December results (February 12).

Economic Releases and Other Events Date Mon Feb 9 Tue

Feb 10

Wed Feb 11

Thu

Feb 12

Fri

Feb 13

Issue No: 09/05

Time (EST) 12:00 20:45 9:00 10:00 10:00 13:00 8:30 9:50 10:00 13:00 14:00 8:30

Indicator Treasury’s Geithner speaks on financial rescue program Dallas Fed Pres Fisher spks on global finl crisis; Houston NY Fed Pres Dudley speaks on inflation; NYC Wholesale Trade (Dec) Geithner testifies on TARP at Senate Banking Committee Bernanke Testifies at House Finl Services Committee Trade Balance (Dec) NY Fed Gov Duke spks on stabilizing the housing market Geithner testifies on TARP at Senate Budget Committee Chicago Fed Pres Evans spks on US economic outlook Federal Budget Balance (Jan) Retail Sales (Jan) Ex Autos 8:30 Initial Jobless Claims 10:00 Business Inventories (Dec) 10:00 U. Mich Consumer Sentiment—Preliminary (Feb)

8

GS

Estimate Consensus Last Report

n.a.

-0.7%

-0.6%

-$35.0bn

-$35.9bn

-$40.4bn

-$80.0bn -0.4% Flat n.a. n.a. n.a.

-$75.0bn -0.7% -0.3% 610,000 -0.6% 61.3

-$98.2bn -2.7% -3.1% 626,000 -0.7% 61.2

February 6, 2009