Resolving Uncertainties: The U.S. Economic Outlook Presented to: Council of Economic Advisors Salt Lake City, Utah March 10, 2003 Presented by: Sara Johnson Managing Director, Global Macroeconomics Group Copyright © 2003 Global Insight, Inc.

2 3/10/2003 Another Jobless U.S. Recovery? The U.S. recovery lost momentum in late Investment and hiring plans are on hold until the Iraq situation is resolved. Consumer spending is driving the expansion; incomes continue to rise, but household finances and confidence have weakened. Business investment has stabilized, but excess capacity will limit its near-term growth. Europe, Japan, and South America are struggling, holding back the recovery in U.S. exports. Expect subpar growth through spring.

Copyright © 2003 Global Insight, Inc.3 3/10/2003 No Employment Growth So Far The U.S. lost 1.9 million jobs from March 2001 to February (Percent change, annual rate)

Copyright © 2003 Global Insight, Inc.4 3/10/2003 Recovery Forces Are in Place Expansionary monetary and fiscal policies— early and often Resilient consumer spending Strong housing demand End of high-tech bust Low inflation and strong productivity growth A successful outcome in Iraq will set the stage for solid growth in late 2003 and 2004.

Copyright © 2003 Global Insight, Inc.5 3/10/2003 The U.S. Expansion Will Strengthen (Percent change, annual rate)(Percent)

Copyright © 2003 Global Insight, Inc.6 3/10/2003 Asymmetric Global Risks Another major terrorist attack Escalation of Iraq war Nuclear weapons in Asia Potential housing market bubbles Policy inflexibility in Europe and Japan Global imbalances from too much dependence on the U.S. locomotive

Copyright © 2003 Global Insight, Inc.7 3/10/2003 Five Scenarios for the Iraq Conflict Baseline—Short War: War starts by March, lasts two months or less, minimal coalition casualties, no oil field damage, oil prices spike to $40 and retreat quickly, 60% probability Victory Without War: A regime change in Iraq without war (or war lasting only a few days), sanctions against Iraq lifted, oil prices drop below $20 then recover as demand strengthens, 20% probability No War, No Resolution: No war but uncertainty over Iraq continues and geopolitical tensions remain high, oil prices are volatile, averaging $30 this year, under 10% probability Long War: War drags on for six months with higher coalition casualties; oil prices stay above $30 this year, under 10% probability Bad War: War escalates to regional conflict, oil prices spike to $60 and average $40 this year, dollar falls 20%, U.S. and world experience a double-dip recession, under 2% probability

Copyright © 2003 Global Insight, Inc.8 3/10/2003 Real GDP Growth in Alternative Scenarios (Percent change, annual rate)

Copyright © 2003 Global Insight, Inc.9 3/10/2003 Crude Oil Prices Will Retreat After the War (WTI price, dollars per barrel)

Copyright © 2003 Global Insight, Inc.10 3/10/2003 A Cold Winter Drives Up Natural Gas Prices (Dollars per million Btus, Henry Hub)

Copyright © 2003 Global Insight, Inc.11 3/10/2003 A Modest Recovery in Copper Prices (Cents per pound)

Copyright © 2003 Global Insight, Inc.12 3/10/2003 Price and Wage Inflation Will Stay Mild (Year-over-year percent change)

Copyright © 2003 Global Insight, Inc.13 3/10/2003 Federal Military Spending Is Surging (Billions of 1996 dollars)

Copyright © 2003 Global Insight, Inc.14 3/10/2003 Government Budgets Are Back in Deficit (Billions of dollars, fiscal years)

Copyright © 2003 Global Insight, Inc.15 3/10/2003 The Federal Reserve Will Start to Raise Interest Rates in September 2003 (Percent)

Copyright © 2003 Global Insight, Inc.16 3/10/2003 Beyond the Technology Bubble: Nasdaq and S&P 500 Indexes

Copyright © 2003 Global Insight, Inc.17 3/10/2003 The Stock Market Will Recover: Returns on S&P 500 Stocks and Treasury Bonds (Percent)

Copyright © 2003 Global Insight, Inc.18 3/10/2003 Capital Gains Have Disappeared (Billions of dollars)

Copyright © 2003 Global Insight, Inc.19 3/10/2003 When Will Profits Recover? Profitability began to deteriorate in late 1997, three years ahead of the stock market downturn. After-tax earnings have fallen 26% from their peak. Earnings will be bolstered by rising productivity. Pricing power will be limited, although the dollar’s depreciation will help. Bottom line: a resurgence in and a slight retrenchment in

Copyright © 2003 Global Insight, Inc.20 3/10/2003 Corporate Profits Will Rebound in (Percent change, NIPA basis)

Copyright © 2003 Global Insight, Inc.21 3/10/2003 Real Equity and Net Worth per Household ($Thousands per household, 2002 dollars)

Copyright © 2003 Global Insight, Inc.22 3/10/2003 Bank Card Delinquency Rate Reaches New High (Percent)

Copyright © 2003 Global Insight, Inc.23 3/10/2003 Real Consumer Spending and Confidence (Annual percent change, 1996$)(Michigan Index, 1967=1.0)

Copyright © 2003 Global Insight, Inc.24 3/10/2003 Light Vehicle Sales Responded to Incentives (Millions of units)

Copyright © 2003 Global Insight, Inc.25 3/10/2003 Monetary Policy Has Stabilized Home-Building (Housing starts, millions of units)

Copyright © 2003 Global Insight, Inc.26 3/10/2003 Allocation of Cash-outs from Home Refinance (Percent of total, January 2001-June 2002)

Copyright © 2003 Global Insight, Inc.27 3/10/2003 Little Improvement in Capital Goods Orders (Billions of dollars, annual rates)

Copyright © 2003 Global Insight, Inc.28 3/10/2003 A Slow Recovery in Real Business Investment (Percent change, 1996 dollars)

Copyright © 2003 Global Insight, Inc.29 3/10/2003 Office Vacancy Rates Have Soared in the Tech Centers, Depressing Construction (Percent of available space) Source: CB Richard Ellis

Copyright © 2003 Global Insight, Inc.30 3/10/2003 Computers and Software’s Share of GDP Will Rise (Consumer & business spending as a percent of GDP)

Copyright © 2003 Global Insight, Inc.31 3/10/2003 Real U.S. Exports and Imports Reflect the Business Cycle and Exchange Rates (Year-over-year percent change)

Copyright © 2003 Global Insight, Inc.32 3/10/2003 Emerging Asia Will Achieve the Fastest Growth (Percent change, real GDP)

Copyright © 2003 Global Insight, Inc.33 3/10/2003 The Widening U.S. Current Account Deficit (Billions of dollars)(Percent of GDP)

Copyright © 2003 Global Insight, Inc.34 3/10/2003 The U.S. Dollar Is Still Overvalued (Real Trade-Weighted Dollar Index, 1996=1.0)

Copyright © 2003 Global Insight, Inc.35 3/10/2003 Western & Southern Regions Lead in Job Growth (Annual percent change, )

Copyright © 2003 Global Insight, Inc.36 3/10/2003 Utah’s Employment Downturn Was Severe (Year-over-year percent change)

Copyright © 2003 Global Insight, Inc.37 3/10/2003 Utah’s Employment and Income Growth (Percent change, state fiscal years)

Copyright © 2003 Global Insight, Inc.38 3/10/2003 Thank you! Visit our web site at