2016 – What’s Ahead? Jonathan Basile Head of Business Cycle Research, AIG Global Economics Business Survey Chair, ISM-New York 212-770-5228 jonathan.basile@aig.com February 24, 2016

Act I: How Did We Get Here? 2008-2010: Fed casts QE, investors go out risk curve, stocks/EM benefit, US recession ends 2011: Global commodity super-cycle peaks, Euro crisis, US debt downgrade 2012: EM industrial slowdown, Euro crisis ends 2013: Fed signals QE rollback, EM taper tantrum 2014: Oil price crash/energy bust, US dollar rallies, Fed ends QE 2015: Chinese devaluation, EM industrial recession, US industrial slowdown, Fed raises rates, Negative interest rates in Euro Area 2016: Global financial market turmoil, Negative interest rates in Japan, Brexit/risk of UK leaving EU, US recession risk rising (Did I miss anything?)

Construction & Services Will We Avoid a Domino Effect? Construction & Services Oversupply red flag still waving Mfg If these fall, job market goes with it Oil price crash Energy Confidence in central banks is glue that keeps this domino from falling

Where Are We Going? 2016 US Outlook: Less Visibility, Mini-Down Cycle (highest probability) Business sector Headwinds more intense on exports, investment, profits Risks from EM industrial recession hit home US oversupply conditions in manufacturing persist Downside risks to goods prices from lower import prices Household sector Tailwinds not as strong Gradual housing recovery should continue Slower job/income growth  slower discretionary spending growth Rising unemployment expectations, stalling income expectations Service prices underpinned by house prices/rents, health care Government sector Tailwinds modest Local government supported by housing market Federal highway bill supportive Presidential election-year uncertainty

When Will Fed Raise Rates Again? Central bank guidance is hooked closely to financial market developments. Two things happen: Visibility in the forecast diminishes Confidence in the forecast drops This creates doubt. And when in doubt, central banks stay sidelined – unless and until the storm passes. Market priced out 2016 rate hikes

Intermission: Any Questions?

Act II: Follow the Profit/Credit Cycle  Early business cycle: Profits accelerate, Credit decelerates/declines Late business cycle: Profits decelerate/decline, Credit accelerates Tighter Credit Conditions Tighter Budgets Slower Credit Growth Slower Purchasing Volume More Competitive Pricing Environment

Act II: Follow the Profit/Credit Cycle  Early business cycle: Profits accelerate, Credit decelerates/declines Late business cycle: Profits decelerate/decline, Credit accelerates Where are we now? Late business cycle.

 Tighter Credit Conditions  Tighter Budgets  More costly to borrow from banks and in corporate bond markets Above Zero = Tighter exception Above Zero = Tighter

 Slower Credit Growth  Slower Purchasing Volume  Ask Credit Managers Manufacturing Services

 More Competitive Pricing Environment Ask Purchasing Managers Manufacturing Services

Thank you for your attention Q&A Thank you for your attention

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