1. After the Recession: The Shape of the Recovery David Wyss Chief Economist 212-438-4952 David_Wyss@standardandpoors.com September 2003

2. 2 The Recession Is Over The good news: it wasn’t much of a recession The bad news: It’s not much of a recovery The recession was mild because: – The Fed shoved interest rates down – Fiscal policy turned very expansionary – And consumers are resilient But consumers are already spending all their money And excess capacity and war fears have business spending on hold The world economic stagnation is widening the trade gap What will the recovery look like – V, U, or W?

3. 3 (Percent) The Fed Loosened Aggressively

4. 4 World Growth Remains Weak (Real GDP, % change)

5. 5 Can the Consumer Keep Spending? Confidence plunged after September 11 The stock market has wiped out wealth Debts and defaults are at record highs Employment continues to drop And the saving rate is low But the tax cuts are providing extra income The stock market is off its lows Lower mortgage rates have freed up funds And confidence has improved after the war Net result will be a slowdown, not a retreat But the saving rate will remain flat

6. 6 Car Sales Remain Strong (millions of units) (4-quarter percent change)

7. 7 Home Prices Are High Relative to Household Income (Ratio of average home price to average household disposable income)

8. 8 Long Bull Markets Are Followed by Periods of Weakness (Percent return on S&P 500 and corrected by CPI)

9. 9 Advertising Comes Back After a sharp drop in 2001 From record 2000 levels TV is coming back quicker Responding to strong consumer sales Magazines are lagging Nonmedia (direct mail, etc), doing better than media Expect 4.8% overall growth in 2003 TV up 4% this year, but 8% next

10. 10 Advertising Comes Back (Percent change)

11. 11 Bottom Line: The Economy Recovers, But Slowly Consumers are spending near max Businesses will not take over the lead yet But strong stimulus from fiscal policy Interest rates rise gradually next year Housing prices and starts slow Weak recovery for stock market Risk of recession remains if: – Further terror attacks – War disrupts oil supplies – Deflation

12. 12 Risks to the Economy (Real GDP, percent change year ago)

13. 13 The Recession Has Been Concentrated on the Coasts Three waves of recession: – High tech affected coasts and Texas – Capital spending cut into Midwest and Carolinas – Tourism after September 11 hit Florida, Arizona, Nevada, Washington Coming back in reverse order Southeast and Northern Plains states least affected Pacific Coast and Great Lakes hardest hit Manufacturing continues to lag recovery

14. 14 Unemployment Rates Are Moderate 4.5-5.4 Under 4.5 5.5 – 5.9 6.0 + (Unemployment rate, July 2003)

15. 15 Manufacturing States Suffer Most 0.1 – 1 Down 1.1 – 1.9 2 + (Change in unemployment rate, July 2003 vs. Oct 2000)

16. 16 Manufacturing Concentrated in Midwest and Southeast 8-11 Under 8 11-15 Over 15 (Manufacturing as percent of state employment)