1. FOR INSTITUTIONAL PROFESSIONAL USE ONLY. IASBO Current Economic Conditions and How They Affect My District Robert Lewis Managing Director, Senior Vice President Tammie Beckwith Schallmo Managing Director, Vice President May 16, 2012

2. 2 Economic Update | Overview Market uncertainty remains unusually high –Employment remains well below desired levels –Housing prices remain weak –Political partisanship and presidential politics continue to fuel market instability (Obamacare, Bush tax cuts and sequestration) –Regulatory change (Dodd-Frank, BASEL III) reduces confidence –Geopolitical factors, particularly in North Korea, Iran and the Middle East –Oil and gasoline prices –Austerity European sovereign debt crises driving market movement –European banks have exposure to debt issued by Greece, Ireland, Portugal, Italy and Spain –Rating downgrades –Market is driven by fear of capital and liquidity shortfalls at banks Fed’s influence on economic growth through monetary policy is diminished by the uncertainty

3. 3 Economic Update | What is the Consumer Price Index? The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The CPI reflects spending patterns for each of two population groups: all urban consumers (CPI-U) and urban wage earners and clerical workers (CPI-W). –The CPI-U represents about 87% of the total U.S. population. –The CPI-U (unseasonal adjusted) is used to determine the limiting rate Source: The Bureau of Labor Statistics

4. 4 Economic Update | What is the Consumer Price Index? The CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought. For the current CPI, this information was collected from the Consumer Expenditure Surveys for 2005 and 2006. –About 7,000 families from around the country provided information each quarter on their spending habits in the interview survey. –To collect information on frequently purchased items, such as food and personal care products, another 7,000 families in each of these years kept diaries listing everything they bought during a 2-week period. Over the 2 year period, then, expenditure information came from approximately 28,000 weekly diaries and 60,000 quarterly interviews used to determine the importance, or weight, of the more than 200 item categories in the CPI index structure. Source: The Bureau of Labor Statistics

5. 5 Economic Update | CPI: January 2008 to Present Year Over Year Source: The Bureau of Labor Statistics

6. 6 Economic Update | Housing Market and Reassessment Source: Standard and Poor’s Case-Shiller Index

7. 7 Relative Reassessment Changes for Sample Tax Bills

8. 8 Economic Update | Housing Starts and Home Sales Source: Haver Analytics

9. 9 Economic Update | Gross Domestic Product GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period

10. 10 Economic Update | Growth Rate of Gross Domestic Product The growth rate is not consistent with prior post recession growth rates

11. 11 Economic Update | Personal Income In March, Personal income went up by 0.4% (consensus 0.3%) and consumer spending increased 0.3% (consensus 0.4%) Despite still high unemployment, the consumer sector is gaining modest momentum but some of the gain has been eroded by inflation Consumer sentiment, as measured by the University of Michigan index, hit a post-recession high in May Source: Bloomberg

12. 12 Economic Update | Savings Rate Source: Bloomberg

13. 13 Economic Update | Retail Sales Retail sales went up in April 0.1% matching the consensus In March retail sales were up 0.8% and 1.3% in February due to strong vehicle sales and gasoline Source: Bloomberg

14. 14 Economic Update | ISM Index The Institute for Supply Management surveys more than 300 manufacturing firms on employment, production, new orders, supplier deliveries, and inventories The index indicates that the manufacturing sector is improving (consensus was 53 and actual was 54.8) The ISM report is showing rising rates of growth vs other indications that point to slowing in the sector The ISM manufacturing index is constructed so that any level at 50 or above signifies growth in the manufacturing sector. A level above 43 or so, but below 50, indicates that the U.S. economy is still growing even though the manufacturing sector is contracting. Any level below 43 indicates that the economy is in recession. Data Source: Haver Analytics

15. 15 Economic Update | Employment In April U.S. unemployment was 8.1% which was a decrease from March –The rate is at a three-year low –The U.S rate was 8.9% one year ago –8.8% and 8.7% for Illinois and the Chicago MSA, respectively, for March 2012 Total nonfarm payroll employment increased by 115,000 in April (Consensus was 165,000) Also, the number of open positions at firms increased to 3.74 million, the most since July 2008 The labor force participation rate is at 65.5% and in 2001, the participation rate was 67.3% If the participation rate was at the same levels as 2001, the unemployment rate would be 13.1% Many adults have stopped looking for work until the market improves Source: The Bureau of Labor Statistics and Foxnews.com

16. 16 Economic Update | Payroll During the Great Recession 8.75 million jobs were lost! We still have not recovered those jobs

17. 17 Economic Update | Unemployment The unemployment rate is at a higher level than what we normally experience at this stage of a recovery –The difference is that this recession was brought on by a financial crisis which is making is more difficult to recover

18. 18 Economic Update | Initial Jobless Claims New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time Source: Haver Analytics

19. 19 Economic Update | Participation Rate The participation rate is the percentage of the adult population that is employed or looking for work

20. 20 Economic Update | April FED Release Highlights Expects economic growth to remain moderate over coming quarters and then to pick up gradually Anticipates that the unemployment rate will decline gradually Strains in global financial markets continue to pose significant downside risks to the economic outlook Anticipates that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014 The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September 2011 (Operation Twist) Maintain existing policies of reinvesting principal payments from holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities Source: The FED

21. 21 Economic Update | Fed Funds Rate Over the past 20 years the average policy change cycle has been approximately 3.25 years As shown below, the latest cycle is extending into a fourth year

22. 22 Economic Update | Total Assets at The FED

23. 23 Economic Update | Total MBS held by FED

24. 24 Economic Update | Treasury Rates

25. 25 Economic Update | Historical Tax Exempt Interest Rates* *The Municipal Market Data “MMD” is a AAA municipal bond market index produced by TM3. As of May 10, 2012.

26. 26 Economic Update | Tax Exempt Yield Spreads* *The Municipal Market Data “MMD” is a AAA municipal bond market index produced by TM3. As of May 10, 2012.

27. 27 Economic Update | Conclusion and Questions Market growth will probably remain slow Keep an eye on Europe to see how the new leadership in France and Greece governs Congressional decisions on Bush Tax Cuts, sequestration and payroll tax cut Housing, Housing, Housing…..

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