1. What’s Ahead For The Economy? The Economic Outlook Group, LLC 475 Wall Street Princeton, New Jersey (609) 529-1300 Bernard Baumohl Chief Global Economist www.EconomicOutlookGroup.com The Lodging Conference 2013 September 18, 2013

2. Scenario A Scenario B Scenario C GDP growth exceeding 3% Economy slips into recession Growth less than 2.5% Economic cycle peaked Dec. 2007 2008 - 2009 recession Recession ends June 2009 Lodging Conference What’s next for the economy? Three possible paths in 2014. 2012 2013

3. Scenario A: Recession Average life span of recovery is just 4.8 years. Sequester will do more damage. Market interest rates keep climbing. Consumers & businesses pull back; The comeback of Europe, China and emerging markets is just wishful thinking. >> Federal Reserve: Ramps up quantitative easing. Scenario B: Dull Growth: Less than 2.5%. US economy stuck in low gear. Higher market rates to restrain growth. Europe “staggers” out of recession. China avoids hard landing, but is beset with debt problems. U.S. confidence vacillates; Spending remains lackluster Employment: a miserly 100K/month >> Federal Reserve: No increase in QE, but may postpone tapering. Scenario C: Stronger Recovery: 3% or better US economy gains more traction. Higher confidence fuels both consumer & business spending Europe emerges from recession. “Worst is over.” Private capital returns to EZ Chinese leaders succeed in achieving growth target, even as it seeks reforms U.S. employment enters in 200K - 300K/month range >> Fed: On track to end QE mid-2014; Higher rates will NOT imperil the recovery.

4. Scenario A: Recession Average life span of recovery is just 4.8 years. Sequester will do more damage. Market interest rates keep climbing. Consumers & businesses pull back; The comeback of Europe, China and emerging markets is just wishful thinking. >> Federal Reserve: Ramps up quantitative easing. Scenario B: Dull Growth: Less than 2.5%. US economy stuck in low gear. Higher market rates to restrain growth. Europe “staggers” out of recession. China avoids hard landing, but is beset with debt problems. U.S. confidence vacillates; Spending remains lackluster Employment: a miserly 100K/month >> Federal Reserve: No increase in QE, but may postpone tapering. Scenario C: Stronger Recovery: 3% or better US economy gains more traction. Higher confidence fuels both consumer & business spending Europe emerges from recession. “Worst is over.” Private capital returns to EZ Chinese leaders succeed in achieving growth target, even as it seeks reforms U.S. employment enters in 200K - 300K/month range >> Fed: On track to end QE mid-2014; Higher rates will NOT imperil the recovery. 15% 35% 50%

5. The consumer is key to the economic outlook! Three main drivers of household spending: 1.Labor market conditions. Is the job market improving? Yes…slowly. 2.Household balance sheets. Have family debt burdens eased? Yes! 3. Household wealth. Have Americans seen their wealth increase? Yes!

6. Source: BLS Peaked at 10% Oct. 2009 7.3% August 2013 Forecast: 6.5% by 2015 Biggest employers Leisure and hospitality Retail Temporary work Construction Energy Unemployment rate has been dropping (….but at an agonizingly slow pace) Monthly change in non-farm payrolls

7. Source: Federal Reserve New applications for unemployment benefits keep falling 4-week moving average 2013

8. Source: Federal Reserve

9. Sources: Federal Reserve, University of Michigan, Conference Board, Bloomberg PLC Motor vehicle sales Are Consumers Upbeat and Spending? Conference Board: Latest consumer confidence near 5½yr high. University of Michigan: Consumer sentiment is just below a 6 yr. peak. Are households spending more on big-ticket items? Yes! Purchases of consumer durable goods accelerated in the last quarter. (IIQ) Retail sales, ex-vehicles New single-family home “lots” sold

10. August new orders to service firms are the highest in more than two years! August new orders to manufacturers were the highest in more than 2 yrs! New orders are accelerating to manufacturers and service firms; It portends greater output and faster hiring in coming months. Orders expanding Orders shrinking Source: Institute for Supply Management (ISM)

11. Source: Federal Reserve Bank credit is becoming more easily available; Assets of U.S. commercial banks, in billions Residential real estate loans Business loans Consumer loans

12. Sources: Federal Reserve, Institute for Supply Management Business Confidence Homebuilder sentiment (NAHB) in August: Confidence surged to an 8-year high! Small business confidence (NFIB): Optimism rose in July to 2nd highest in a year. Quarterly CEO confidence survey by Conference Board (conducted in July): Sentiment highest in more than a year! Real (inflation-adjusted) U.S. exports of goods and services STARTS of single-family home construction PERMITS filed for single-family home construction Homebuilders are struggling to keep up with permits filed for SFH Private non-residential construction spending improving. Public non-residential construction spending is shrinking! Debt ceiling crisis / fiscal cliff fears

14. Democrats & Republicans still butt heads over the budget. Q: Will the lack of an agreement imperil growth? A: No! The deficit is shrinking at the fastest pace since WW II. Deficit in 2014 to drop to 3.4% of GDP, avg. of the last 30 yrs. Debt ceiling: No chance House will allow U.S. to default. U.S. budget deficit as % of GDP Forecast Source: CBO, The Economic Outlook Group WHO SUCCEEDS BEN BERNANKE? Janet Yellen? Donald Kohn? Larry Summers? George Clooney? Makes little difference. Tapering to commence soon regardless. 10-yr. Treasury yields will hover 3.2% - 4.2% in 2014. Fed funds rate to remain 0% - ¼% until late 2015. The normalization of interest rates is a good sign!

15. GLOBAL MONETARY EASING IS DRAWING TO A CLOSE: More than 500 interest rate cuts have occurred worldwide since June 2007. The payoff: Faster growth in 2014 - 2015 WHO IS THE NEWEST EMERGING COUNTRY? IT IS THE UNITED STATES! > Energy revolution = It will have a profound impact on aviation, travel, tourism, manufacturing and the dollar. OPEC and Russia to be losers. > U.S. to regain competitive advantage. Outsourcing becomes much less attractive. > Capital of innovation = iPhone, Google Glass, Tesla, 3-D printing, Robotics, Genomics. EMERGING COUNTRIES NOW DEALING WITH “GROWTH PAINS”: > 3.5 BILLION PEOPLE will move from rural areas to cities in the next 5 to 10 years; $20 TRILLION to be spent on infrastructure to support this massive migration. > MORE THAN 50% of global GDP growth in the next 10 years will STILL come from emerging economies. BRACE FOR MORE SERIOUS EXOGENOUS SHOCKS: Middle East, Asia, global terrorism, cyberwar ––– all pose great threats to business. Yet few firms perform stress tests to evaluate their vulnerabilities!! The most important forces that will shape the global economy